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4. Forms of Conducting a Business

The various legal forms available to an entrepreneur are similar in all the countries surveyed. The three most commonly used forms are sole ownership, partnership and a limited liability company. Two further options are available, but rarely used in Southern Africa: the business trust and the cooperative society.

4.1 Sole ownership

Although statistics are not available, sole ownership is probably the most commonly used business form in all countries. Informal sector (and micro) enterprises are usually in sole ownership. The rules regarding sole ownership appear to be the same in each country surveyed.

The person who runs a business on his or her own account is known as the sole owner (or sole proprietor) of that business. The major advantage of sole ownership is flexibility: the sole owner can run the business as he or she wishes, without having to consult with any other person. Registration requirements are minimal, (although in all countries, the sole owner who wishes to trade under a name which is not his or her own name should register under the Registration of Business Names Act, or equivalent legislation, see below at 4.4). A sole owner can also employ others to work for him or her.

The main disadvantages of sole ownership are that:

  • The owner of the business is personally liable to an unlimited extent for all the debts of the business. The effect of this rule is that if the business fails spectacularly, the owner may loose virtually everything that he or she owns;
  • In several countries, the sole owner is excluded from tendering for certain public sector contracts - especially in the construction industry (for example, Botswana and Namibia apply this rule for certain categories of contract); and
  • In most countries, the more sophisticated financial service businesses such as banking may only be undertaken by limited companies.

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4.2 Partnership

The rules on partnership do not vary greatly in the countries surveyed. In every country, the essence of a partnership is that two or more persons agree to carry on a business together in order to make a profit for their joint benefit. Some countries such as Malawi, Tanzania and Zambia have a Partnership Act which provides rules to govern the relationship both internally between the partners themselves, and externally between the partners and third parties. Elsewhere (in the Roman-Dutch legal systems of Botswana, Namibia, South Africa, Swaziland and Zimbabwe), partnerships are governed by common law (judge-made law) rather than by legislation. However, this distinction is of little practical significance, because the substantive rules of partnership, whether laid down by common law or by statute, are broadly similar.

The main advantages of a partnership are similar to those associated with sole ownership: simplicity and flexibility. No formal documentation is needed to start a partnership, and the partners are generally free to run the business as they wish. The risks associated with a partnership are also similar: a partner is generally liable for all the debts of the business on the same basis as a sole owner. Every partner is liable jointly with the other partners for all debts and obligations of the firm incurred while he or she is a partner.

A partnership may be formed without making a written partnership agreement, although this is invariably done in more sophisticated undertakings. The partnership agreement will regulate matter such as the nature of the business, management responsibilities of the partners, division of profits and losses, and so on.

In all countries, there are rules limiting the number of partners which a business may have - typically, a partnership may not have more than twenty partners.

4.2.1 Forms of partnership available: liabilities of partners

Once again, there is a slight difference between the rules of the

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countries whose legal system is based on English common law (Malawi, Tanzania and Zambia), and those based on Roman-Dutch law (Botswana, Namibia, South Africa, Swaziland and Zimbabwe)

In the English common law countries, a partnership may either be limited or unlimited. A limited partner may restrict his/her liability for the firm's debt and leave the other general partner(s) responsible to an unlimited extent. A partner who limits his/her liability in this way is sometimes referred to as "sleeping" or "dormant" partner and as such takes no part in the day to day management of the firm while retaining his/her right to share profits. The English Limited Partnership Act of 1907, which applies in English common law countries such as Zambia, allows for the formation of so-called limited liability partnerships in which one or more of the partners limit their liability. The Act, however, provides that in such partnerships there must be at least one general partner who accepts unlimited liability.

In practice, limited partnerships are not common. Where entrepreneurs wish to limit their liability, they usually form a limited liability company.

In the Roman-Dutch countries, it is also possible to create a partnership in which one (or more) of the partners has limited liability. There are two types of partnership available for this purpose, known as the anonymous partnership and the commanditarian partnership. In each of these partnerships, the partner who has limited liability must be concealed from the outside world - the business is carried on by the other partners in their own names.

4.2.2 Dissolution

Rules regarding partnership dissolution appear to be virtually identical in all countries surveyed. In Malawi, for example, a partnership may be dissolved in the following circumstances:

  1. if entered into for a fixed term, by the expiration of that term;

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  2. if entered into for a specific purpose or undertaking, by the completion of that purpose or undertaking;
  3. if entered into for an undefined time, by any partner giving notice to the other partner(s) of his/her intention to dissolve the partnership;
  4. subject to any agreement between the partners, by the death or bankruptcy of any partner;
  5. the illegality of the partnership; and
  6. by order of the court.

In Zimbabwe, as in the other countries, the circumstances in which a court may order dissolution include

  1. Mental disorder of a partner;
  2. Permanent incapacity through illness of a partner where the illness renders the partner substantially incapable of performing his duties for an unreasonably long time;
  3. Conduct by a partner that destroys the mutual trust on which the partnership is based;
  4. The impossibility of making a profit; and
  5. Circumstances making it just and equitable that the partnership be dissolved. Mutual loss of confidence and the impossibility of further co-operation would be sufficient grounds, provided the fault does not lie with the partner seeking dissolution.

4.3 Cooperatives and Companies

In some European and Asian countries, the cooperative structure is commonly used for business purposes. However, in Southern Africa, very few businesses are organised as cooperatives. The aim of this section is to explain how the legal rules which apply to cooperatives in one surveyed country (Botswana), discourage use of the cooperative structure for business activities, and make the private company a much more attractive vehicle for business operation.

In Botswana, cooperatives are available for groups of people who have common economic needs. The objective of a cooperative is to

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provide services to members in order to satisfy such needs. Although cooperatives are similar to companies in some respects, the rules governing cooperatives are different to those governing companies - particularly with regard to profits. In fact, so far as the law is concerned, cooperatives do not make ‘profits’. Their aim is to provide services to their members at cost price, and if there is any ‘surplus’, it may only be used for certain approved purposes.

Cooperatives also have very different rules regarding membership. In a private company, membership (in the form of holding shares) can be restricted to a small group of people such as the members of a family. In contrast, a basic cooperative principle is that membership should be ‘voluntary and open to all’. This means that a cooperative should admit anyone who needs its services, subject only to formalities such as age, residence and payment of a minimal membership fee.

Companies and cooperatives are governed by these different rules because they are intended to serve very different purposes. A company gives a business owner much greater flexibility in the way that he or she runs the business. The courts are generally reluctant to interfere in the internal affairs of a company, because of what lawyers call the principle of majority rule. According to this principle, the person(s) who controls the majority of voting shares in a company is entitled to run the company as he or she thinks fit, and it is only in very exceptional circumstances that a court will overrule the wishes of the majority shareholder. Cooperatives, on the other hand, were originally developed in order to help the poor and needy. A cooperative enables people of limited income to pool their resources and increase their purchasing power - the cooperative is thus able to buy goods in bulk at the lowest market price so that they can be resold to members as cheaply as possible. Because cooperatives aim to serve the needs of their members, they are organised on democratic principles. Decisions at meetings of members are made on the basis of ‘one member, one vote’ - unlike a company, where voting power is determined by shareholding, with the effect that one member may control all decisions. Cooperatives are also subject to fairly strict supervision by the Department of

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Cooperative Development, which organises regular inspections of their work and audits their accounts.

For these reasons, anyone seeking to start-up a business in Botswana would be advised to form a company rather than a cooperative. However, once the business is up and running, in certain circumstances, its owners may benefit from forming or joining a cooperative, such as for example a Marketing and Supply Cooperative. Many farmers in Botswana have joined this type of cooperative in order to market their produce (such as livestock, grain, vegetables) and to obtain supplies of fertilisers and animal feeds at a competitive price. Such cooperatives do not themselves buy the farmers’ produce, but rather act as agents for the farmers, to sell on their behalf. Once produce is sold, the cooperative takes an agreed commission (to cover its overheads), and pays the balance to the farmer. A manager is appointed by the cooperative to take charge of the marketing operation, with responsibility for taking care of the produce, selling it at the best available market price, and ensuring that the farmer is paid as quickly as possible. A Marketing and Supply Cooperative can also offer a range of additional services to its members such as:

  • technical advice for improving the quality of produce;
  • making advances on produce entrusted to it for sale;
  • granting loans to members; and
  • taking care of members’ savings by accepting deposits and paying interest.

It is not only farmers who may benefit from the formation of such a cooperative. Groups of producers or manufacturers often have similar common economic needs in relation to the supply of raw materials and the marketing of their goods, and several such ‘Producers Cooperatives’ have already been formed.

4.4 Law of business names

The law of business names is very similar in all countries surveyed. The basic requirement is that an individual (or company) who trades under a name which is different from his/her/its own

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true name is required to register a ‘business name’ in a central registry. The purpose of the requirement is twofold:

  • to avoid confusion (by ensuring that confusing or similar business names are not registered); and
  • to enable persons who deal with such businesses to discover the true name of the business owner.

4.4.1 Botswana

The Registration of Business Names Act [Cap. 42:05] requires any person who operates a business under a name which is not his/her own name to register the ‘business name’. The procedure for registration is straightforward. A special application form (Form RBN/2, obtainable from the Registrar of Business Names, located in the Division of the Registrar of Companies at the Ministry of Commerce and Industry) must be completed and returned to the Registrar. Details to be entered in the application form include the proposed business name, a statement of the nature of the business, the address and postal address of the business, and personal details such as the business owner’s full name, nationality and sex. Details of other business occupations, and of any licences held are also required.

The Registrar will refuse registration of a name if:

  • It is the same as a name already registered under the Registration of Business Names Act (or under the Companies Act), or very similar to such a name
  • It gives the impression that the business is connected with the President or the Government of Botswana, or with any government of any country or with the United Nations
  • It is likely to mislead the public - for this reason a word such as „international" is usually not allowed. A name beginning with the word „Botswana" is also no longer allowed, although the word may be included elsewhere in the name.
  • The use of certain other words is restricted by other laws. For example, no person other than a licensed bank may use the words „finance", „loan", „credit", „savings", or „bank" in their

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    name unless permission is obtained from the Bank of Botswana. The word „cooperative" can only be used in a name if the Commissioner for Co-operative Development gives approval.

  • The Registration of Business Names Act also requires that all trade circulars and business letters showing the business name must also include the name(s) of the individual(s) or company that is carrying on the business.

4.4.2 Malawi

Under the Business Names Registration Act (Cap. 46:02), any business conducted by a firm or an individual person under a ‘business name’ is required to register with the Registrar General of Business Names. The Act seeks to ensure that no similar business names are registered that may confuse members of the public.

4.4.3 Namibia

Similar rules apply regarding the circumstances under which a ‘business name’ must be registered. The registrar's directives were published in the Government Gazette no 596 of March 1993 as an amendment to the existing Act 61 of 1973, sections 42-51.

The main guidelines are that:

  • A name which in the opinion of the Registrar is undesirable will not be allowed as the name of a company or business;
  • A name that is identical to a name already registered, or so nearly resembling such a name as to be calculated to deceive or mislead the public will not be allowed;
  • A name that is calculated to mislead the public will not be allowed;
  • Foreign words or phrases will not normally be allowed in the name;
  • Where a vernacular word is to be used for the name of a company, the meaning of the word in the official language in the Republic of Namibia, should be endorsed on the form

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  • A shortened form of a name may not contain more than seven letters. No figures will be allowed;
  • A name must consist of at least three letters of the alphabet;
  • Words proclaimed under section 15 of the Merchandise Marks Act, 1941 (Act 17 of 1941) are not allowed; and
  • When the word "international" appears in the name of the company to be registered, the applicant must show proof of international status.

4.4.4 South Africa

Any company or close corporation is required to reserve a name for itself with the Registrar of Companies or Close Corporations prior to registration. The name will only be approved by the Registrar if it (or a close approximation of it) is not already in use, and if it is not deemed undesirable or offensive for any reason.

Business names in South Africa falling outside of the scope of the above are regulated by the Business Names Act, 1960. This contains provisions relating to disclosure of names and business details, and also allows the Registrar to prohibit use of a name if it is undesirable or offensive, or if it is calculated to mislead the public.

A measure of protection also exists at common law, which prohibits a business from passing itself off as another, or from capitalising on the success of another, by improper use of a business name.

4.4.5 Swaziland

Company names are protected under the Companies Act No. 7 of 1912 as amended. The Act provides that a company may not be registered by a name identical with that by which a company in existence is already registered, or so nearly resembling that name as to be calculated to deceive, except where the existing company is in the course of being dissolved and signifies its consent in such a manner as the Registrar of Companies requires.

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The Registrar is also required by Act No. 10 of 1969 to keep a register of business names. An application may be made by any person with sufficient interest to register a business name. Upon receipt of an application, the Registrar is required to publish the particulars of that application by notice in the Government Gazette, inviting persons who object to the registration of the name to do so in writing and in the prescribed form. Such objections should be lodged within one month of publication. The Minister of Interior is required to consider such applications and objections, and to decide upon the matter. If the application is successful the Minister may grant the application.

The owner or user of a registered name has the sole and exclusive right to use the name. Act No. 10 of 1969 further provides that no person shall use a registered name or a name so closely resembling a registered name as might lead to a reasonable belief that it is such name, unless such person has written authority from the user of that name to use the same.

A person who contravenes Act No. 10 of 1969 may be sued in any Magistrate's Court for damages and for an injunction (interdict). Further, the unauthorised user of the name may be prosecuted in a criminal Court and if found guilty he may be fined for his criminal conduct.

4.4.6 Tanzania and Zambia

Similar laws apply in Tanzania and Zambia. The Zambian statute (the Registration of Business Names Act [Cap. 389 of the Laws of Zambia]) appears to have virtually the same provisions as the Botswana Act (the Registration of Business Names Act [Cap. 42:05 of the Laws of Botswana]).

4.4.7 Zimbabwe

The effect of the law of business names is that:

  • A company shall not, without the consent in writing of the Minister, be registered by a name which includes the word "President", "Government" or "State" or any other

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    abbreviation or initial which suggests that it enjoys the patronage of the President or the Government or of any department of the government;

  • No name shall be reserved (and no company shall be registered by a name) which is the same as that of a registered company;
  • The Registrar may, unless otherwise ordered by the Minister, refuse to register a company by a name which in his opinion is likely to mislead the public or to cause offence to any person or class of persons or is suggestive of blasphemy or indecency or which he considers to be undesirable for any other reason; and
  • The Registrar shall refuse to register a company under a name in which the word „cooperative" or any contraction or imitation thereof forms a part.

© Friedrich Ebert Stiftung | technical support | net edition fes-library | November 2000

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