Ever wondered what the reason behind the (Pty) Ltd, Ltd or Inc. after a company’s name is? Surprisingly, it plays a vital role in the corporate environment. These types of companies are known as profit companies. At the same time, this might seem obvious; there are two categories of companies that can be formed and incorporated under the Companies Act 71 of 2008. A profit company is formed for the purpose of benefiting the shareholders in a financial perspective. The profit company division has four subcategories: private company, public company, personal liability company and state-owned company. Each subcategory has its unique characteristics. For this article, we will only be looking into the basics of a private company, public company and personal liability company.

Private Company

A private company is owned privately, and the Memorandum of Incorporation (MOI) prohibits it from issuing any of its securities to the public, limiting the transferability of its securities as well. Hence, a private company’s name must end with the expression ‘Proprietary Limited’ or with the abbreviation ‘(Pty)Ltd. A private company requires at least one incorporator to form the company. Although only one director is required, it is subject to the company’s MOI. Moreover, in the financial part of a private company, the default position is that the annual financial statements are required to be inspected independently but not necessarily to be audited.

Hence, if legislation requires otherwise, then compliance is expected. Another factor that will be required to be audited is the size of the private company and its influence on the public. Notable, the flexibility of a private company is based on its securities; any holder of the securities will also be a director of the private company. Furthermore, restrictions on the transferability of securities exist because holders of securities are also directors. Section 8(2) of the Companies Act 71 of 2008 regulates the limits.

Public Company

On the contrary, section 1 of the Companies Act 71 of 2008 defines a public company as a non-private or personal liability company which is not state-owned. In addition, securities of a public company can be offered to the general public and can also be transferred freely as the holders wish to. Hence, a public company is required by legislation to appoint a company secretary, an audit committee and an independent auditor. As such, annual financial statements have to be audited as well. Listed public companies and public companies with public interest that exceeds the threshold score prescribed by the regulations have to appoint a social and ethics committee.

Furthermore, a public company’s name has to end with the word ‘Limited’ or with the abbreviation ‘Ltd’. Also, it is required that a minimum of at least three directors be appointed, followed by the audit committee, which must also have at least three independent non-executive directors. Then, the social and ethics committee is required also to have at least one non-executive director. The offer by a public company of shares to the public must be distinguished from the listing of a public company’s shares on a securities exchange such as the JSE Limited.  The benefit of listed shares is that they are operated in an organised, encrypted house, which is also more accessible to the general public, which makes them more attractive to the public and provides certainty.

Personal Liability Company

Personal liability companies are subjected to similar receptiveness as compared to private companies. Section 19(3) of the Companies Act 71 of 2008 is what distinguishes a personal liability company from a private company in that directors and past directors, together with the company itself, are jointly and severally liable for any debts and liabilities that were acquired at the respective periods. Furthermore, persons will be regarded as having notice and knowledge of the personal liability company in relation to the effects of section 19(3).

Then, a personal liability company must also have the word incorporated or the abbreviation ‘Inc’ attached to the end of the name.

Ultimately, those who wish to operate as a personal liability company enjoy the convenience and advantages of a separate liability company and perpetual succession while complying with all the required professional rules which require personal liability. On the other hand, to ensure accountability on the part of directors of the company in relation to personal liability as well.

Conclusion

All the different forms of profit companies are mainly based on their differences in the internal operations of finances and the effects of management of securities in the corporate environment. 

Written by Riaan Basson, Candidate Attorney, SchoemanLaw