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Start-ups under South African Law

Navigating the Legal Landscape for New Businesses

Starting a business is exciting and while most founders focus on sales & marketing, there is a plethora of legal requirements that must be met to ensure compliance and protection for your business. Understanding these requirements is crucial for long-term success and avoiding legal pitfalls. This blog post outlines the primary regulatory requirements that start-up founders should be thinking about.

Choosing a Business Structure

The first step for any start-up in South Africa is to select a business structure. Each business structure has its own set of pros and cons:

 

  • Sole Proprietorship: This is a business owned and operated by a single individual and requires minimal regulatory compliance. The owner trades in their own name and is personally liable for all business debts.  Income is taxed according to the individual tax rates.  This is ideal for small, low risk businesses with an expected annual revenue of up to a few hundred thousand Rand.  This form of business is not suitable for a business with more than one stakeholder or one  trading within a regulated environment or with a larger turnover.
  • Private Company (Pty Ltd): Registering a Pty Ltd offers the benefits of limited liability and a flat tax rate on taxable income of 27%.  The company is a separate legal entity and liability is ring-fenced to the company itself (separate from the owner’s personal estate and affairs).  It requires at least one director and one shareholder. The Pty Ltd must adhere to the Companies Act of 2008, which includes the submission of annual returns and maintaining a registered office.  It is ideal for any size business and is preferable for most businesses that aim to make a profit.  This form of business is more costly to run because of additional expenses such as regulatory filings, accounting and legal support.  However, all such expense are business expenses that are deducted from the business revenue before any income tax is levied.
  • Non-Profit Company (NPC): Registering a NPC makes sense for companies created for public benefit or social purposes rather than for the purpose of making a profit.  The company must adhere to the Companies Act of 2008 and must have at least three directors. The profits and property of the company are not distributed to its incorporators or directors (except for reasonable compensation for services rendered to the NPC).  Depending on the NPC’s objectives and founding documents, it may be possible for the NPC to apply for income tax exemption, but this is not automatic and is a completely separate and very technical process.  This form of business is appropriate for charitable organisations such as foundations and churches.
  • Partnership: Partnerships are agreements between two or more individuals who join forces to operate a business or buy assets together.  They are easy to establish and require minimal compliance. However, there is no limited liability because partnerships are not separate legal entities and the partners are jointly and severally liable in their personal capacities for debts of the partnership.  This means that your personal estate is at risk. Partners share profits, losses and responsibilities.  Income of the partnership is taxed in the hands of the partners as individuals in terms of the individual tax table.  Having a well drafted partnership agreement is essential to this form of business in order to outline each partner’s rights, responsibilities, profit sharing, dispute resolution mechanisms and succession planning.
  • Trust: Trusts are legal arrangements where property is held by and managed by trustees on behalf of the founder and for the benefit of beneficiaries.  Trusts are complex to set up, have a high tax rate of 45% and are mostly appropriate for estate planning purposes.  Trusts provide a layer of protection against personal creditors and can enable the protection of inheritances for beneficiaries once the founder passes away. Trusts are not typically used as a form of business.

Business Registration & Filings

If you select a Pty Ltd or NPC as your form of business, then the business needs to be registered with the Companies and Intellectual Property Commission (CIPC).  Registration involves choosing a company name, submitting an application form and uploading supporting documents such as the identity documents of the director/s and paying the required fee. Once registered, the business receives its founding documents including its registration number, which is essential for all further legal and financial transactions. 

 

Shortly after registration, you will need to file the beneficial ownership of the company.  If you register a Pty Ltd and there is more than one owner (shareholder), then it is also highly beneficial to put a shareholders’ agreement in place to regulate your roles, responsibilities, profit sharing, dispute resolution and share disposal arrangements.  Failing to put an agreement in place can increase the risk of disputes arising between shareholders, especially once the company starts making money.

 

There is a requirement to keep your CIPC records updated in respect of changes to directors, addresses, beneficial owners and memorandum of incorporation updates.  There is also a requirement to file an annual return with CIPC.

Tax Compliance

Once registered, the business must register for tax with the South African Revenue Service (SARS). This includes appointing a representative in respect of all tax affairs with SARS, obtaining an Income Tax Reference Number, registering for Value-Added Tax (VAT) if the business's annual turnover exceeds R1 million or if you wish to claim back all VAT on goods and services acquired, and complying with Pay-As-You-Earn (PAYE) obligations if the business employs staff.  It is a good idea to retain an accountant to assist with your SARS and CIPC filings, preparation of annual financial statements and payroll processing.

Labour Law Compliance

Start-ups that employ staff must comply with South Africa’s labour laws, which are designed to protect employees' rights and promote fair labour practices. The Basic Conditions of Employment Act (BCEA) requires that you put in place an employment contract with all employees including a job description, working hours, remuneration, notice period for termination, leave entitlement etc.  The BCEA also dictates the minimum requirements for compliance with labour laws such as giving employees 15 working days of annual leave.

Consumer Protection

Businesses that provide goods or services to consumers must comply with the Consumer Protection Act (CPA). Businesses must ensure that their products and services meet acceptable standards of quality and safety. Consumers must be provided with sufficient information to make informed choices about products and services.  Misleading advertising, unfair contract terms, and other unfair business practices are prohibited.  It is imperative that your terms and conditions are drafted in compliance with the CPA.

Intellectual Property Protection

Protecting intellectual property (IP) is essential for start-ups to safeguard their innovations and brand identity. South African law provides for the protection of trademarks, copyrights and patents, some of which require registration with CIPC.

Registering a trademark with CIPC provides legal protection for the business's name, logo, and other brand elements. Obtaining a patent will protect new inventions and innovations, granting the patent holder exclusive rights to use and commercialize the invention.

Legal Documentation and Templates

To protect their interests and comply with regulatory requirements, start-ups should put in place various legal documents and templates. Depending on the type of business, these could include:

  • Service Agreements: Clearly outline the terms of service, payment details, and responsibilities for any business partnerships or customer relationships.
  • Website Terms and Conditions: These should outline the terms of use for your website, including intellectual property rights, disclaimers, and limitations of liability.
  • Company Policies: Clearly defined policies on issues such as workplace conduct, data protection, and employee benefits can help establish a professional and compliant business environment.

Permits & Licenses

Certain businesses are required to obtain special permits or licenses to trade.  For example, any business that sells foodstuffs, liquor or goods defined as ‘medicine’ will need to apply for licensing to ensure that they are safe for public consumption.  The provisions of certain services will also require licensing, such as financial services.  In addition to licensing, regulations may place additional requirements on your ability to trade.  Product labelling is regulated to ensure that consumers are aware of ingredients, expiry dates and manufacturing information, for example.  Before commencing trade in any regulated industry, it is important to retain legal counsel to assess your compliance obligations. 

Conclusion

Navigating the regulatory landscape is a critical aspect of establishing and running a successful start-up in South Africa. By ensuring compliance with the relevant laws and regulations, businesses can avoid legal issues and focus on growth and innovation. It is advisable for start-up founders to seek legal advice and stay informed about changes in legislation to maintain compliance and achieve long-term success.