# General Business Category > General Business Forum > [Question] Friend operating under my business

## Saskeaus99

Hi, what is the dangers or implications for someone else/another company to operate under my company? My friend has a successful business which isn't registered. I have a newly registered business which I haven't used to trade yet. I'm the only shareholder and director of my company but I'll have no profits because it will all go to my friend. I suspect he have tax issues therefore he wants to use my company. Is this even legal?

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## Dave A

What is the upside for you in this deal? I see only risk (lots and lots of risk), but zero benefit.




> Is this even legal?


I wouldn't think so based on what you presented.

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## Citizen X

> I suspect he have tax issues therefore he wants to use my company. Is this even legal?


Tax issues? Definitely not

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## HR Solutions

> Hi, what is the dangers or implications for someone else/another company to operate under my company? My friend has a successful business which isn't registered. I have a newly registered business which I haven't used to trade yet. I'm the only shareholder and director of my company but I'll have no profits because it will all go to my friend. I suspect he have tax issues therefore he wants to use my company. Is this even legal?


The implications are huge.  Basically *everything* he does legal or illegal is happening with you name.

I would NEVER allow anyone to do this.

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## BusFact

I actually can't see anything strictly illegal with it as long as he has your consent to run your company as a manager for example. But if he runs the business using your company name then there are hoops to jump through. You will need to file tax returns, you will need to pay an accountant for annual account reviews and you will need to open a bank account. It will have to be very clear to all customers and suppliers that they are dealing with your company and not his old business.

You will take on a lot of risk and responsibility by letting him in. If anything goes wrong you personally will have to pay any arrear taxes and possibly staff and suppliers too. As a director you are expected to oversee the running of a company and will be blamed for anything going wrong - not your friend.

Its just not worth it.

Rather come to a business arrangement where you agree in writing as to who does what and who gets paid what, and make it worth your while. Become partners, don't do him a "favour". You cannot let him run the business without your supervision.

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## Saskeaus99

Thank you all for your responses! Well, there will be some benefit for me. A good percentage of profits will go my way. We had a discussion and it seems to me that I will be part of the company (Operating Director). I will forsee books are in order, staff gets paid, company policies being adhered to etc. All seems legit besides the point that his not on the company books as an employee, director or shareholder. Do u see risks if I make sure that the company adhere to business law?

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## Dave A

> All seems legit besides the point that his not on the company books as an employee, director or shareholder. Do u see risks if I make sure that the company adhere to business law?


In that situation, the risks would seem to be in the court of your friend that you might not honour the agreement between you, or poorly execute the affairs of the business.

Despite any assurances received, I suggest you probably need to take care around the reasons why the interest of your friend in the business is not being disclosed. It's flirting in the realm of dishonesty, and I would not rely on anyone being honest about why they are being less than honest...

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## Greig Whitton

> I'm the only shareholder and director of my company but I'll have no profits because it will all go to my friend.





> Well, there will be some benefit for me. A good percentage of profits will go my way.


Which one is it?  :Confused: 

Regardless of whether you benefit from this arrangement or not, the elephant in the room is this:




> My friend has a successful business which isn't registered.


If your friend's business is so successful, why doesn't he just register it? The process is relatively quick, straightforward, and inexpensive. Why give up a share in profits and operational control by trading under someone else's business? There are only two possible explanations that I can think of:

(a) There is some strategic benefit (e.g. your friend has more demand than he can cope with and your business has spare capacity to service that demand).

(b) Your friend has been (and/or still is) doing something dodgy and wants to hide it in your business (or possibly even set you up as a fall guy if everything goes south).

Until your friend can decisively demonstrate the former, I would advise staying far away.

From the tone of your posts, it sounds like you suspect your friend of foul play but are tempted by a potentially lucrative opportunity. Don't let short term gains cloud your foresight. Keep your hands clean and play the long game.

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## Justloadit

A typical example will be over committing and under delivering.
Who is going to be responsible to the customer?
What about warranty?
Professional indemnity?
and many more......

Your name and company name is the one that will be used by the client. The client does not know your relationship, and in all cases will hold you personally responsible for any wrong doing or legal relief.

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## Lorenc

and you agreed?? :Confused:

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## Houses4Rent

From what see here I can see only red flags and would not allow this until I am 100% certain I know all the true reasosn as to why your friedn doe snot want to register his own business. Did you find that out?

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## Phil Cooper

In terms of King commission, you, as a Director, can be held liable IN YOUR PERSONAL CAPACITY, for certain actions carried out by the Company.

It is based on what you SHOULD have known, and not what you DID know.

If your friend does something unlawful / illegal - or just plain negligent, and an action is bought against the Company, YOU could be held liable PERSONALLY - and lose your assets.

Be VERY careful!

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## Andromeda

The King Commission is an interpretation of the Companies Act, nothing more.

The whole process documented here is pretty much how a private company evolves. I reckon Saskeaus99 is pretty much in charge of his affairs.

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## HR Solutions

> The King Commission is an interpretation of the Companies Act, nothing more.
> 
> The whole process documented here is pretty much how a private company evolves. I reckon Saskeaus99 is pretty much in charge of his affairs.


What is that supposed to mean ?  Phil is totally correct !

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## Dave A

The King Commission was an investigation into match fixing in cricket. (Edwin King)

The King Report is about Corporate Governance. (Mervyn King)

All said, add a dose of "best practice" and Andromeda is pretty much on the mark. The King Report is a powerful influencer in the realm of corporate governance, but it is not in itself statutory.

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## HR Solutions

> you, as a Director, can be held liable IN YOUR PERSONAL CAPACITY, for certain actions carried out by the Company.
> 
> It is based on what you SHOULD have known, and not what you DID know.
> 
> If your friend does something unlawful / illegal - or just plain negligent, and an action is bought against the Company, YOU could be held liable PERSONALLY - and lose your assets.
> 
> Be VERY careful!



Still totally correct

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## Andromeda

The personal liability of directors, other than when related to insolvency, is primarily towards the company. The Act does not differentiate between owner managed and non-owner managed, so the issue of personal liability of director towards the company or towards the shareholders, or both, is applicable also to small owner managed private companies.

In a nutshell, if a company loses money (and by extension the shareholder loses dividend) due to the negligence or recklessness of a director, then they are able to hold the director personally liable.

Sec 77 of the Act is what makes this so:
_
1)	In this section, ‘‘director’’ includes an alternate director, and—
a)	a prescribed officer; or
b)	a person who is a member of a committee of a board of a company, or of the audit committee of a company,
irrespective of whether or not the person is also a member of the company’s board.

2)	A director of a company may be held liable—
a)	in accordance with the principles of the common law relating to breach of a fiduciary duty, for any loss, damages or costs sustained by the company as a consequence of any breach by the director of a duty contemplated in section 75, 76(2) or 76(3)(a) or (b); or
b)	in accordance with the principles of the common law relating to delict for any loss, damages or costs sustained by the company as a consequence of any breach by the director of—
i)	a duty contemplated in section 76(3)(c);
ii)	any provision of this Act not otherwise mentioned in this section; or
iii)	any provision of the company’s Memorandum of Incorporation.

3)	A director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director having—
a)	acted in the name of the company, signed anything on behalf of the company, or purported to bind the company or authorise the taking of any action by or on behalf of the company, despite knowing that the director lacked the authority to do so;
b)	acquiesced in the carrying on of the company’s business despite knowing that it was being conducted in a manner prohibited by section 22(1);
c)	been a party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder of the company, or had another fraudulent purpose;
d)	signed, consented to, or authorised, the publication of—
i)	any financial statements that were false or misleading in a material respect; or
ii)	a prospectus, or a written statement contemplated in section 101, that contained—
aa)	an ‘untrue statement’ as defined and described in section 95; or
bb)	a statement to the effect that a person had consented to be a director of the company, when no such consent had been given,
despite knowing that the statement was false, misleading or untrue, as the case may be, but the provisions of section 104(3), read with the changes required by the context, apply to limit the liability of a director in terms of this paragraph; or
e)	been present at a meeting, or participated in the making of a decision in terms of section 74, and failed to vote against—
i)	the issuing of any unauthorised shares, despite knowing that those shares had not been authorised in accordance with section 36;
ii)	the issuing of any authorised securities, despite knowing that the issue of those securities was inconsistent with section 41;
iii)	the granting of options to any person contemplated in section 42(4), despite knowing that any shares—
aa)	for which the options could be exercised; or
bb)	into which any securities could be converted,
had not been authorised in terms of section 36;
iv)	the provision of financial assistance to any person contemplated in section 44 for the acquisition of securities of the company, despite knowing that the provision of financial assistance was inconsistent with section 44 or the company’s Memorandum of Incorporation;
v)	the provision of financial assistance to a director for a purpose contemplated in section 45, despite knowing that the provision of financial assistance was inconsistent with that section or the company’s Memorandum of Incorporation;
vi)	a resolution approving a distribution, despite knowing that the distribution was contrary to section 46, subject to subsection (4);
vii)	the acquisition by the company of any of its shares, or the shares of its holding company, despite knowing that the acquisition was contrary to section 46 or 48; or
viii)	an allotment by the company, despite knowing that the allotment was contrary to any provision of Chapter 4.

4)	The liability of a director in terms of subsection (3)(e)(vi) as a consequence of the director having failed to vote against a distribution in contravention of section 46—
a)	arises only if—
i)	immediately after making all of the distribution contemplated in a resolution in terms of section 46, the company does not satisfy the solvency and liquidity test; and
ii)	it was unreasonable at the time of the decision to conclude that the company would satisfy the solvency and liquidity test after making the relevant distribution; and
b)	does not exceed, in aggregate, the difference between—
i)	the amount by which the value of the distribution exceeded the amount that could have been distributed without causing the company to fail to satisfy the solvency and liquidity test; and
ii)	the amount, if any, recovered by the company from persons to whom the distribution was made.

5)	If the board of a company has made a decision in a manner that contravened this Act, as contemplated in subsection (3)(e)—
a)	the company, or any director who has been or may be held liable in terms of subsection (3)(e), may apply to a court for an order setting aside the decision of the board; and
b)	the court may make—
i)	an order setting aside the decision in whole or in part, absolutely or conditionally; and
ii)	any further order that is just and equitable in the circumstances, including an order—
aa)	to rectify the decision, reverse any transaction, or restore any consideration paid or benefit received by any person in terms of the decision of the board; and
bb)	requiring the company to indemnify any director who has been or may be held liable in terms of this section, including indemnification for the costs of the proceedings under this subsection.

6)	The liability of a person in terms of this section is joint and several with any other person who is or may be held liable for the same act.

7)	Proceedings to recover any loss, damages or costs for which a person is or may be held liable in terms of this section may not be commenced more than three years after the act or omission that gave rise to that liability.

8)	In addition to the liability set out elsewhere in this section, any person who would be so liable is jointly and severally liable with all other such persons—
a)	to pay the costs of all parties in the court in a proceeding contemplated in this section unless the proceedings are abandoned, or exculpate that person; and
b)	to restore to the company any amount improperly paid by the company as a consequence of the impugned act, and not recoverable in terms of this Act.

9)	In any proceedings against a director, other than for willful misconduct or willful breach of trust, the court may relieve the director, either wholly or partly, from any liability set out in this section, on any terms the court considers just if it appears to the court that—
a)	the director is or may be liable, but has acted honestly and reasonably; or
b)	having regard to all the circumstances of the case, including those connected with the appointment of the director, it would be fair to excuse the director.

10)	A director who has reason to apprehend that a claim may be made alleging that the director is liable, other than for willful misconduct or willful breach of trust, may apply to a court for relief, and the court may grant relief to the director on the same grounds as if the matter had come before the court in terms of subsection (9)._

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## HR Solutions

The point is a director is still liable in a PTY LTD.

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## Dave A

> The point is a director is still liable in a PTY LTD.


Quite clearly that it is your point.

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## Andromeda

Liable yes, primarily to shareholders, namely himself.

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Dave A (02-Aug-16)

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## Justloadit

> Liable yes, primarily to shareholders, namely himself.


and clients & creditors.

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## HR Solutions

> and clients & creditors.



Especially them

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## BusFact

Most importantly, and significantly ....... SARS.

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## Saskeaus99

We came to the conclusion to NOT go ahead. To much complications with the bank accounts and bookkeeping. Thanks for all your answers!

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## HR Solutions

Good move

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