STRUCTURING A PROPERTY PURCHASE USING THE VARIOUS LEGAL ‘ENTITIES’ THROUGH WHICH PROPERTY CAN BE OWNED

From a purely financial perspective it may seem obvious why it may be beneficial anyone who wants to structure the purchase of a property through as juristic entity as opposed to making the purchase as an individual, including a reduced tax obligation, protection from creditors on liquidation (of the juristic entity) or sequestration (of yourself), divorce and the possible mitigation of inheritance related taxes, subject to any applicable limitations of course.

Below is an overview of the forms of legal ‘entities’ through which property can be owned in South Africa, which include:

– individual(s)
– companies (private, public)
– trust
– partnership

This is meant to be a brief overview on each and not a complete thesis or even legal and/or tax advice.

Natural Persons

Individual(s) purchasing a property in their own personal name is the most common of all the forms of purchasing and owning property. You can even purchase it as a group in which case you will all own an equal undivided share in the property and all your names will appear on the title deed.

Individual take personal responsible for everything, creditors, taxes, maintenance etc.

Importantly individuals should consider their marriage regime when purchasing property as it has implications, especially when a property in bought by a group of individuals and if you don’t want too much tears, consult a professional consult a professional to help you understand the various implications.

Companies

Typically there are two types of companies:  

– private [(Proprietary) Limited]
– public [Limited]

You can no longer register closed corporations. These are not treated the same as private companies, even in instances where a formal conversion has not been made.

Our focus though will be on private companies.

Private companies are the most commonly used amongst company types to purchase and own the property. A private company can purchase and own in its own name, with the name of the company appearing on the title deed.  The owners of the company are the shareholders, who will have share certificates to prove their ownership and interest in the company.

The company is governed by the memorandum of incorporation and the shareholders’ agreement. It is of upmost importance to always get a professional lawyer, specialising in commercial matters and company formations to draft these documents as they ultimately dictate how shareholders engage with each other and how the company is ot be run. Failing to do so and doing your own cut and paste internet job which may not fit your needs, is a quick way ensuring everything ends in tears.

The shareholders will appoint the directors and a management team, who together will manage the day to day operations of the company.

A private company can only have a maximum of 50 shareholders. Such shareholders can be individuals, trusts and other companies.

Debts in the company are limited to the company but banks will generally require shareholders to sign sureties or guarantees in order to have recourse against them should the company fail to pay its debts. This is generally dependant on the size of the company (smaller the company and its balance sheet, the more collateral or security that will be required).

Creditors cannot take action against directors or shareholders in their personal capacity unless they have been fraudulent, reckless or have not complied with their fiduciary duties.

Companies pay less tax (28%) than individuals or trusts and if you are a property ‘trading’ company VAT on sales can be zero rated. Transfer duty is payable at a flat rate of 8%. Always get tax advice from a tax expert or else it will cost you more in the long run and end in tears (ask a few footballers and entertainers).

Shareholders receive money through dividend payouts and pay dividend tax.

Death of a director or shareholder or their exit doesn’t trigger any taxes in respect of the company assets, which remain held by the company, so no estate duty.

Everything above applies to public companies save for that:

– public companies can have unlimited shareholders, instead of being limited to 50;
– offer shares to the general public;
– can be, but not necessarily, registered on an exchange;
– have much more stringent compliance requirements (i.e audited financials, minimum 3 directors etc).

If you are not listed, the headache of a public company is not worth it.

Trusts  

Trusts are created by a founder for the benefit of the beneficiaries by the founder(s). These are either inter vivos (created by a leaving person) or testamentary (trust created through a will).

Trustees are appointed via the trust deed, which sets out how the trust will be administered, to manage the trust assets on behalf of the beneficiaries. The trustees have a fiduciary duty towards the beneficiaries and to always act in their best interests.

The trust deed should deal with all admin issues including any future foreseeable circumstances. Again I cannot stress the importance of getting professional assistance in setting up and managing a trust. Don’t be a Ratanang!

Creditors have recourse only to the trust assets. If the founder or the beneficiaries die, no estate duty is payable and the trust continues to exist.

Trusts are taxed at 45%, higher than companies and less than some individuals. On purchasing a property, the trust pays flat transfer duty rate of 8% on all assets.

Partnerships  

For completeness, I deal with partnerships which have really become uncommon save for in very small specialized professional areas. Partnerships are technically NOT separate legal entities as the owners are always seen as individuals but can enter into contracts as the partnership. The property will be registered in the name of the partners with each of their names appearing on the title deed, where it must be stated that they are acting as partners.

Partners are jointly and severally liable for debts of the partnership and creditors can come after each of them or one of them for any amounts outstanding.

Each partner is taxed as an individual and all taxes such as estate duty and capital gains are charged to each partner as an individual on the value equal to each individual partners in the partnership interest.

The struggle with juristic persons is generally how to capitalize them, especially if you are looking to acquire property by obtaining a loan. Banks make funding available by looking at past behavior in respect of cash flow and ability to repay debt, this is easy to assess for an individual but will be a struggle for newly registered entities. Some banks will look at the individuals behind the entities and ask them to sign sureties or guaranties in order to provide them with funding but depending on the risk appetite, most lenders struggle to provide funding on this basis. You will therefore need to spend some time capitalizing the entity and creating a ‘track record’ of income.

*Disclaimer: The contents of this article should not be considered as legal, professional, financial or any other form of advice. These are merely views based on the writer’s personal experience. Readers should obtain independent advice on any matter prior to making any decision.

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