South Africa was ranked 34th out of some 183 countries in the 2010 World Bank survey for ease of doing business. The survey took into account the 46 sub-Saharan African countries and effectively placed South Africa in the number two slot on the African continent, falling only behind Mauritius.
It follows that a number of expats migrate to this economic hub in order to "set-up shop". That said, growth potential is not a guarantee that this endeavour will bode successful, and before foreigners relocating can start making their millions they'll need to familiarise themselves with some important facts regarding opening a business in South Africa.
Deciding on your company structure
In the first instance, a decision needs to be made as to the correct type of company formation.
South Africa offers a number of alternatives for the prospective business person or company:
Sole proprietor – little legal protection and no separate financial liability from the business owner. Ideally suited for the small and self-run business with easy setup and reporting.
Closed Corporations – being a legal entity in its right, it offers far more in the way of legal protection, ownership is restricted to legal persons and sometimes trusts. The owners are referred to as members, of which there must be a minimum of 1 and maximum of 10 individuals. Relatively easy, affordable and quick to set up with management the responsibility of the members it can be used by any size of business but generally is more suitable for SME's and owner run organisations.
Pty Ltd – it can be difficult to decide between a closed corporation and Pty Ltd, determining factors towards a Pty Ltd include: if your intention is not to owner-run the company, if you are appointing a director(s) to run the company, if there are to be more than 10 shareholders, or if you wish to have the flexibility of another company purchasing shares. It can also be seen as a 'larger' company by carrying the “Pty Ltd tag”
Branch – For companies already in existence outside of South Africa that are seeking to open up a subsidiary, a branch structure can be an option.
Shareholders can be situated outside of South Africa, although a responsible person in South Africa must be named. An auditor must be appointed but only in respect of the income statement and all profits can flow to the international company once taxed has been paid.
Selecting the correct company structure can have a profound effect on your business, tax levels, ability to raise finance and BBBEE (Broad-Based Black Economic Empowerment) strategy. It is imperative the right decision is made, and expats opening a business in South Africa are strongly encouraged to seek advice from an expert.
Naming your company
Some legislation is currently underway regarding promotion of a business under the 'trading as' which may have a profound effect on sole proprietorships and partnerships.
For closed corporations and Pty Ltd's in order to reserve a name and subsequently register it, they would need to make an application to CIPRO (Companies and Intellectual Property Registration Office of South Africa). Companies can use the tool on the CIPRO website to carry out an initial search to see if a name is available for reserving, but please note this only looks for exact matches and is no guarantee of a name reservation.
Subsequent to your initial search, a CK 7 form needs to be submitted to CIPRO for a closed corporation and a CM5 for a Pty Ltd, along with the appropriate fee. If accepted, you will receive a CK7 or CM5 confirmation that will reserve the name (if available) and the registration process of your company can begin. It is worth providing a few alternatives in case your first choice is not available as this can save considerable time.
Timeframe: usually 5 to 15 days
Registration process for companies
The procedures for registration of companies varies according to whether it is a closed corporation or Pty Ltd.
Closed Corporation – applications should include the founding statement application, a CK1 application form (in duplicate) an approved CK 7 (name reservation form) and a letter of consent (original) from the appointed accounting officer.
Timeframe: usually 5 to 30 days
A Pty Ltd – applications should include a copy of an approved CM5 (name reservation), a Power of attorney where applicable, a CM22 (notice of postal address and registered office address) in duplicate, the Memorandum and articles of association, in duplicate (one copy bound in book form and one certified by a notary public), a CM1 certificate of incorporation, a CM2 (first page of memorandum of association), stamped with a appropriate registration fee, a CM44 (signature page for subscribers), a CM46 (certificate to commence business), stamped R60 and aCM47 for each director.
Timeframe: usually 5 to 30 days
Trademarks, Patents, Copyrights and protected design are also all available via CIPRO.
Sole proprietors – taxed as per individual rates on a sliding scale of 18% to 40% after applicable allowances
Closed Corporations and Pty Ltd.s – 28% of gross profit
Small businesses – sliding scale from 0% to 28%
Personal service providers – 33% (please note STC not applicable)
Branches – 33%
Tax on Dividends (applicable to resident companies only)
Dividends are taxed by means of a Secondary Tax on Companies (STC) at a rate of 10%
Pay as you earn (PAYE)
Unemployment fund (UIF)
Skills development levy (SDL)
Value added tax (VAT) – where applicable
International companies establishing a presence in South Africa may need to bring in foreign staff, even if just for the initial period.
For temporary travel (but not employment) such as the initial business set-up, establishing contacts or taking care of formalities a business visa would be most appropriate.
For seconded staff relocating to South Africa, an intra-company permit is generally more appropriate.
If there is foreseen a requirement recruit a large number (5 plus) the company should investigate the appropriateness of a corporate permit.
Opening a business in South Africa, although involving some complex decisions, is quite a quick and inexpensive process that can be handled from abroad with the assistance of a suitable company.
*This article was written in 2011. Legal requirements are subject to change.