The Private Business Corporation
This was born out of the Christie/Fairbairn Inquiry into Zimbabwe Company Law, Final Report, with the objective of creating a simplified legal framework for small business enterprises to avoid legal complexities associated with the Companies Act. It is the equivalent of the RSA Closed corporation.
The enabling legislation is the Private Business Corporations Act (Chapter 24:11) which came into effect on the 5th of May 1997 through Statutory Instrument 105/1997.
The characteristics of a private business corporation (PBC) are:
- Has a minimum of one member and maximum of 20 and can exist with no members at all for a season under certain conditions. (Section 22 clauses 1 and 20). Unlike a Private Limited company which requires at least two directors this can operate with only one member.
- Only natural persons can be members. In other words a trust or a private limited company cannot be a member. Under this section a minor can also be a member.(Section 23) This is great because then you can create PBC with yourself and any minor child being members if you wish. Or you can have the minor be the only member and you become the guardian and so control the asset without having it under your name.
- Can convert to a private company using the same name as before.
- It enables a small business to become a body corporate with limited liability and perpetual succession.
- Is simple to use – no requirement to appoint directors draw Memoranda and Articles of Association. These are replaced by an “incorporation statement”.
- Registration procedure is straightforward – participating members complete incorporation statement in the prescribed form – lodge it with Registrar of Companies who then issues a certificate of incorporation.
- No need to state objects in incorporation statement .
- Regulation is not statutorily rigid.
- Administration is not expensive as very few formalities or legal requirements have to be met.
- No requirement to appoint directors or to hold formal meetings. Meetings are not compulsory and can be held on an ad hoc basis
- Not allowed to issue shares – members hold an interest in the corporation which is recorded in percentage terms in the incorporation statement.
- In the event of the winding-up of the corporation, a member will be entitled to a share in the assets of the corporation in proportion to his percentage.
- Once a member’s interest in the corporation changes (i.e. either increases or diminishes) the member is required to immediately surrender to the corporation for cancellation any certificate previously issued to him in lieu of a new one showing his correct percentage interest in the corporation.
- Not required to publish or submit accounts to the Registrar of Companies but must make out financial statements and to keep accounting records for tax purposes.
- Can only use the abbreviations PBC at the end of its name but not (Private)/(Pvt) Limited/Ltd or Ltd.
- Accepts pre-incorporation contracts.( Act 24:11 Section 19. ) In other words you can enter a contract as a trustee of a yet to be formed PBC and once company is formed then it can ratify and take over the contract
- PBCs may become shareholders in other companies
- All members may take part in management of the PBC
- The private business corporation has not been as popular as the private company despite the intentions of the legislature to demystify company law, as discussed below.
A Comparative Analysis of the Private Company and the Private Business Corporation as Tools of Wealth Management and Preservation
|Private Business Corporation
|Enjoys Perpetual Succession
|Enjoys Perpetual Succession
|Can Have A Maximum Of 50 Members
|Can Have A Maximum Of 20 Members
|Companies Can Be Shareholders
|Companies Cannot Hold A Member’s Interest
|Comprised Of Directors And Shareholders
|Comprised Of Members
|Has A Memorandum
|Has A Founding Statement
|Registered Articles Of Association
|Articles Of Association Are Not Required
|Compulsory Annual Return To Be Lodged
|No Annual Return To Be Lodged
|Has Share Capital
|Has Member’s Contributions
|Has An Auditor
|Has An Accounting Officer
|Convenes An Annual General Meeting
|Annual General Meeting Not Required
|Certificate Of Incorporation
|Certificate Of Incorporation
|Members Hold Shares
|Members Hold Member’s Interest
|Can Acquire Its Own Shares Under Certain Circumstances
|Can Purchase A Member’s Interest
|Directors Are Responsible For The Day To Day Management Of The Company
|Members Are Responsible For The Day To Day Management Of The PBC
|Register Of Members
|No Register Of Members
|Audited Financial Statements
|No Financial Statements needed
|Prohibition On A Company To Provide Financial Assistance For The Acquisition Of Its Own Shares
|No Prohibition On A PBC To Provide Financial Assistance For The Acquisition Of A Member’s Interest
- Legal strategies for wealth management and preservation must evolve around the optimum use of the three fundamental corporate principles;
- Perpetual succession,
- Limitation of liability, and
- Corporate body status.
- Perpetual succession,
- This attribute allows the business to perpetuate itself beyond the lives of those who formed it hence lending the business the opportunity to become trans- generational provided minimal statutory regulations are adhered to.
- Perpetuity attracts a wider range of specialized skill to the business which in turn contributes to business development .
- The Labour Act provides that a contract of employment is automatically terminated on the death of the proprietor which in most cases spells doom to the employees concerned.
- Under either company, it is fairly easy to attend to succession issues. In the case of a private company, this can be achieved through a change in or a sale of shareholding. Under a PBC, succession issues are attended to through the rectification of the certificate of interest.
- Limitation of Liability.
- Both structures allow a limitation of liability in the absence of fraud or manifest injustice to third parties
- Liability is limited to the contributions that members have make in the event of the winding up of the business.
- In the absence of fraud, limitation of liability in an operating environment involving risk, is a good insulator of assets.
- Comparatively both business models address the doctrine of limitation of liability without fundamental differences.
- Corporate Body Status.
- Both business models recognize their respective entities as juristic persons with a separate legal identity from its members.
- the doctrine is a useful tool for creating a dichotomy between the personal assets of members and those of the business.
- Both benefit from the presumption of procedural regularity which is embodied by the certificate of incorporation.
- Both have in built mechanisms designed to protect shareholders (in the case of the private company) and to protect members from oppression (in the case of the PBC).
- Both models have self-regulating mechanisms which create a balance between the rights and obligations of the members of the company/PBC
- Disposal of a member’s interest especially in the case of death, may be fraught with difficulties.
See Section s28 to 36 of the PBC Act.
- The corporate veil can be lifted for similar reasons in either case.
See Section 318 of the Act as read with Section 43 of the PBC Act.
- The private company can borrow from its own members and directors and can even grant them a preference of other creditors.
- Easy to establish and to operate with minimal regulatory requirements. Low costs of establishment and easy to run with no requirement for meetings.
- The life of the PBC is perpetual
- Members of a PBC have a limited liability for the debts of the PBC except under certain exceptional circumstances. E.g. where a member acts irresponsibly
- Transfer of ownership is easy
- Fewer legal requirements than a private company
- No need for audit
- Minors accepted as members
- Minimal number of members is one. Many people have been forced to include people they did not want to meet the minimum requirements for a private limited company
- Unlike a Private limited company a PBC may assist a member financially to acquire an interest in the corporation should the member need capital. See section 36
- Making changes/amendments to the Founding Statement of a PBC is easy and inexpensive.
- A PBC has no board of directors like a company, management is therefore the responsibility of the members, as they are usually hands-on with the day to day running of the establishment.
- Members restricted to 10 natural persons which may limit the expansion of the business.
- When applying for a loan, banks or other financial institutions might require the financial documents of the PBC to be audited. Financial aid will be considered only after the PBC has been audited.
- It could be difficult for members to leave the PBC or to pay a member their portion because all members must agree to dispose of a member’s interest.
- Because every member may act as a representative or agent of the PBC, the PBC is bound by its member’s actions, introducing a potential risk to the business entity!
- A PBC cannot be sold to a company simply because a Company cannot be a member of a PBC. If a Company wants to take ownership of a PBC, the PBC first needs to be converted into a company.
- A PBC cannot become part of a group structure, meaning that a PBC cannot become a member of a Company or another PBC.
- Major decisions concerning the PBC can be made by member/members who have a total membership of at least 75%. Decisions like these must be in compliance with the PBC agreement drawn up between the members of the PBC.
- Its taxed as if it were a Company. This means that the tax rates are substantially higher than tax rates that apply to partnerships and sole traders.
- More legal requirements than sole proprietorship
I trust this brings clarity to this relatively unknown entity and provides pointers to its potential use and its limitations in asset protection planning which shall be discussed in detail later.