A successful business may be so because it has many customers or in spite of having only one. Of course the business with only one Customer is probably not a business at all. It is more likely to be some sort of self employment scheme which has gotten lucky.
Some years ago I drove into the Johannesburg CBD, down the Rissik Street off ramp where I was greeted by a group of protesters. It’s quite funny to think of it now. They were all white, mostly middle aged and male. They were protesting outside SARS (or whatever it was called in those days), the change to some tax laws. Their placards called on motorists to hoot if they agreed.
The law change was to do with employers no longer being able to contract single workers through the worker’s close corporation. Up until then the company would treat the CC as a supplier, pay the VAT if applicable and then claim the expense as usual. There was no real benefit to the employer, except that he was able to attract and keep some very good talent as a result, and there was less by way of admin involved.
The first time I came across the idea was when I was working in the small remuneration department of a bank in the mid 80’s. It was a revolutionary idea at the time, and we spent much time wrestling with the concept of cost to company, as the bank tried to negotiate with this specialist who eventually headed up a significant division. He always billed the bank as a close corporation.
Ten years later the practice was widespread. For the sole members of these close corporations things were very peachy. With tighter labour legislation the “employer” felt better. For SARS, not so much.
Travel, telephone and even a portion of the upkeep of the family home suddenly became claimable through the CC. SARS was out of pocket. So SARS made it clear that sole membership close corporations would be treated as being in employment relationships with their sole customer. Therein lay the trick: Make sure that you have more than one customer.
A sole customer company is imminently unsellable, even if it has hundreds of employees. Even companies with only a few customers are generally of little value to anybody who is not the technician within the company. The loss of one customer would mean the immediate loss of all the future profits, and probably a whole lot of capital to boot.
With time the dust settled, and single membership CCs quietly went about their businesses. Then in 2010 business rescue and chapter 6 of the Companies Act 71 of 2008 came into being. The very first business rescue that we were exposed to had an interesting twist:
There were lots of employees, and two “independent contractors” who were contracted through their companies. They also did a bit of work for some other customers in the industry, or so was their right.
Part of the rescue plan involved retrenching a significant portion of the workforce. The retrenchment bill was eventually settled with the proceeds of a sale of assets of the company, and all employees were paid out in full. This is where the independent contractors found themselves out in the cold; they were not employees. Employees are preferent creditors in a liquidation or business rescue. Independent contractors are concurrent creditors, and must settle for the dregs alongside the other suppliers.
At some stage in the not too distant future, a similar disaster is going to arise around “employees” being taken out in a major liquidation or business rescue where the troubled company has used labour brokers to run their workforce. The result will be that where they would have been treated in a preferential manner, they will instead be left claiming their usual salary from the labour broker. If the broker is a small outfit with tight margins and small reserves, the labour broker itself could find itself in business rescue with even more business rescue practitioner expenses diluting the pot.
Such are the twists and turns of changing business rules in a country with a history.