Promoters, shareholders, directors and employees
We form hundreds of companies for clients with the result that, because meetings with me are free, I get to talk to hundreds of entrepreneurs. It is quite clear that many of them do not understand the distinction between a company’s promoters, shareholders, directors and employees, so here’s a guide.
Now, I’m not going to get technical, so if you’re studying for an exam, go to the Companies Act for the full story. I just want to offer a simple explanation that everyone can understand.
The Promoter(s) form a new company at CIPC by choosing a name and signing the relevant documentation, most particularly the Memorandum of Incorporation (MOI). Amongst other things, the MOI will specify the authorised number of shares (usually 1 000) and state that there is no restriction on the company’s activities. At the same time, the Promoters will appoint the first
Directors, whose job it will be to run the company for the benefit of the owners or
Shareholders. Once CIPC have registered the company, the company will sell and issue some of the authorised shares (usually 100 or, if we are doing the job, 120) to the shareholders. It can charge whatever it likes for these shares as they have no specified par value (unlike under the old Companies Act), so one of the shareholders may pay R1 per share, whilst another may pay R1 000 per share. Once purchased, the shares have equal rights regardless of the selling price. The proceeds of the sale become the company’s share capital. The shareholders have no say in the running of the company, however, they have the power to appoint and remove directors. If dividends are declared, they will receive them (after deduction of Dividends Witholding Tax) in proportion to their number of shares, again regardless of what they paid for them. That’s all they get out of being shareholders unless, or until, they sell their shares, when they will get the proceeds of the sale.
Employees are the people employed by the company in order for it to conduct its business. It is important to note that directors are usually employees and that they draw a salary and perhaps benefits and bonuses as employees. they pay PAYE just like anyone else. Their packages will be determined by what they are expected to contribute as employees and will bear no relationship to what they may have paid for any shares that they hold.
Example. So let’s take a real life example. Diana and Paul decide to go into business together. Paul has money to invest but will only be able to work two days a week for the business as he has other businesses to run, whilst Diana has the time and skills to get the business up and running. They promote a new company with 1 000 authorised shares. They are both appointed as directors and each buys 60 shares. Diana pays R1 for each of her shares and Paul pays R2 000 each. The share capital of the company is R60 from Diana and R120 000 from Paul, or R120 060 in all.
They agree that Diana will receive a salary of R40 000 per month plus a R8 000 travel allowance whilst Paul will receive R16 000 per month.
At the end of the first year, the company has made a net profit of R200 000. After deducting 28% company tax, there’s R144 000 retained earnings. The directors decide to declare a dividend of R44 000 and retain the R100 000 for working capital. Dividends Witholding Tax of 15% is deducted leaving R37 400 for the shareholders. Daina and Paul each get R18 700 as they own equal numbers of shares.
Ten years later, the company is valued at R10m and they decide to sell for that price. The buyer buys 60 shares from Diana for R5m and 60 shares from Paul, also for R5m.
Diana has made a capital gain of R4 999 940 and will pay CGT on that amount, whilst Paul has made a taxable capital gain of R4 880 000.