01 - Business Entities Flashcards
What are the factors to take into account when choosing a business entity?
The number of persons involved The extent of these persons’ involvement The required capital at commencement of business The sources of capital Relevant tax considerations The necessity to limit liability The expected duration of the business venture
What are the general characteristics of a sole proprietor?
Not a separate legal entity (Business assets and liabilities form part of personal estate – no distinction). Profits from business is added to person’s other income. Interest earned on business bank account is added to the other interest earned by person (e.g. only R23 800 exempt if under 65). If business makes loss it can normally be set off against other sources. It does not qualify as a “small business corporation” but can qualify as a micro business
What are the advantages of a sole proprietorship?
-No formalities required to start the business -No partners or board to report to – self-employed -No formalities to stop doing business, other than settling liabilities Income from business accrues straight to proprietor Income tax and CGT relatively simple The proprietor can insure own life to cover liabilities in order to ensure smooth transfer of all business assets to heirs after death
What are the disadvantages of a sole proprietorship?
All the proprietor’s assets are at risk -All licences, agreements and goodwill ceases at death of the proprietor -Business will cease on death of proprietor -All business assets will be subject to CGT on death of the proprietor due to deemed disposal of all a natural person’s assets to estate on death Sole proprietor cannot be employee of the business and therefore not belong to pension fund A sole proprietorship is more difficult to sell than a separate entity
What are the general characteristics of a partnership?
A partnership is an agreement between natural or juristic persons, under which each partner agrees to contribute to the partnership. The partnership’s object is the making of a profit. The partnership’s business is conducted for the joint benefit of the partners. Partnerships can be: -universal partnerships or specific partnerships. -ordinary partnerships or extraordinary partnerships.
What is the difference between a universal and a specific partnership?
A universal partnership occurs when -partners contribute all their property or all their profits to the partnership, -usually for an open-ended period -and for wide-ranging purposes, -with a commensurate sharing of the profits of their enterprises. Example - Marriage in community of property is (or a similar relationship can be) a universal partnership, but universal partnerships also occur in commercial undertakings. A specific partnership will usually be a -more temporary and focused arrangement, -in terms of which partners contribute their resources for a particular defined purpose only -and share only in profits from that particular project together, e.g. a professional partnership like architects or engineers.
What are the types of partnership?
In an ordinary partnership, partners are jointly and severally liable for all of the debts of the partnership. The liability of partners in an extraordinary partnership is limited in some way. There are different forms of extraordinary partnership: -An anonymous partnership has at least one partner whose name is not disclosed to the public and who is not liable to third parties for the debts of the partnership, but is liable to the other partners to the extent agreed between the partners. -A partnership en commandite has undisclosed partners who make a fixed contribution and whose liability to other parties is limited to that fixed commitment.
What are the essentials of a partnership?
Each party must make an appreciable contribution to the partnership; The business is carried on for the joint benefit of the partners; The objective should be to make a profit; and The agreement between the parties should be legitimate and made with the intention to establish a partnership.
What are the rights of a partner in a partnership?
Financial -Share in the profits of the partnership; -Compensation for services rendered to the partnership; -A share of the assets when distributed on dissolution of the partnership. Non-Financial -Participate in the management of the business; -Inspection of the partnership books;
What are the duties of a partner in a partnership?
Financial -Make a contribution towards the partnership; -Share in losses of the partnership; Intent -Accept and fulfil the obligations of the partnership agreement; -Procure benefits for the partnership; Competence and Information -Exercise care and skill in all actions in connection with the business of the partnership; -Make full disclosures of information relevant to the partnership; -Guard against conflicts of interest.
Is a partnership a separate juristic person?
No. A partnership does not have separate legal personality from its members. The partners own the partnership property as co-owners and the rights and liabilities of the partnership are also the individual partners’ rights and liabilities. Therefore, the death of a partner brings the partnership to an end. This can be dealt with in the partnership agreement by immediately creating a new partnership between the remaining partners. Two exceptions to this rule are: -The sequestration of a partnership estate is, to an extent, treated as separate from the estates of the individual members of the partnership. -A partnership may sue and be sued in its own name.
How is a partnership terminated?
-Expiring of the term for which the agreement was entered into; -The end of the business undertaking or reason for existence; -Mutual agreement between all the partners; -A notice of dissolution given by one of the partners in terms of the agreement; -An order of court granted upon application of one or more of the partners for good cause. -A change in the membership of the partnership (a new partnership may be agreed to); -The insolvency of the partnership or any of its members; -Partners becoming alien enemies on or after the outbreak of war;
What are the advantages of a partnership?
-Uncomplicated to form -No registration requirements, except for a specific trade or profession Partners can conduct any business and are only limited in this by any relevant provisions of the partnership agreement. A partnership en commandite can be very useful for certain investment schemes, e.g. property development.
What are the disadvantages of a partnership?
No perpetual succession. Upon the death of each partner, or if a partner gives a notice of dissolution, the partnership comes to an end. Partners are jointly and severally liable for the liabilities of the partnership, with the exception of extraordinary and en commandite partners.
What are the general characteristics of close corporations?
-Close corporations (CC’s) were created under the Close Corporations Act, 69 of 1984. -The new Companies Act, 71 of 2008, put and end to this. -Existing CC’s continue to operate under the 1984 Act, but no new corporations can be formed. CC’s are separate juristic persons with perpetual succession and do not die with the member(s). Members hold a member’s interest, expressed as a percentage. Members can enter into an association agreement and buy-and-sell agreements.
What is the nature and the number of members allowed within a CC?
A CC can have anything from 1 to 10 members. Members can be: Natural persons; The executor or administrator in the deceased estate of a member; The trustee or curator of the insolvent estate of a member; A trustee of a testamentary trust if - beneficiary of the trust is a natural person and - if the trustee is a juristic person it is not controlled by a trust beneficiary; A trustee of an inter vivos trust, subject to certain conditions - beneficiary of the trust is a natural person; - The total number of beneficiaries, together with the total number of members of the CC may not exceed ten. -If it does, the trustee ceases to be a member and that membership can never be reinstated.
What are the rules of Association Agreement that may not be altered?
Disposing of an insolvent member’s interest (see sec 34); The members who are disqualified from taking part in the management of the CC (see sec 47); The right of a member to call a meeting.
What are the standard rules of the Association Agreement that may be altered?
Financial -Every member is indemnified with respect to expenses incurred in connection with the business. -Payments to members (profits) will be in proportion to their membership interest. Non-financial -Every member is entitled to participate in the business of the CC. -Every member has an equal right to take part in the management of the CC. -Decisions must be by majority vote, in accordance with the percentage membership interest.
When would the separate legal status of a CC be pierced?
-Abuse of the existence of the CC; -Making of certain loans without the consent of all members; -Acting with gross negligence, intent to defraud, etc. -Members who do not qualify to be members; -Taking part in the management while being disqualified; -Failure to appoint an accounting officer; -Failure to act with the necessary skill;
What are the advantages of a CC?
• Very flexible, and can be converted into a company if need be. • Can act quickly and easily due to simple structure. • Less complex legislation than company legislation • No directors, and hence no complex rules to protect members against abuses of power by directors. • Perpetual succession and limited liability (to an extent). • Can purchase member’s interest. • The turnover is unlimited, only the number and nature of members are limited. • There is a measure of protection in that certain decisions can only be taken by a majority vote.
What are the disadvantages of a CC?
The CC Act can be too simplistic with inadequate protection for minorities. Many parts of the 2008 Companies Act are now incorporated by reference. The corporate veil can be pierced or lifted more easily because of the informality of the structure. -The absence of an association agreement can cause serious problems. -In the absence of an association agreement, any member of the CC can incur liabilities on behalf of the CC. -An association agreement binds a new member although that member did not participate in the drafting of the agreement.
What are the general characteristics of companies?
The Companies Act, 71 of 2008, came into effect on 1 May 2011, replacing Act 61 of 1973. -The new Act encourages business activity by providing a more flexible regulatory environment. -The focus is now to make a company and its office bearers accountable to relevant stakeholders. -The new act focusses on an enlightened approach to shareholder value. -Shareholders must promote the success of the company in their collective best interest -Shareholders must foster positive relationships with employees, customers and suppliers. The company is allowed to regulate itself through its Memorandum of Incorporation (MOI), which can vary significantly from company to company. The act prohibits - reckless trading and trading in a negligent or fraudulent manner. Under the new act existing close corporations can continue, but no new close corporations may be formed.
What are the types of company that can be set up?
Profit company – incorporated for the purpose of financial gain for its shareholders. The maximum number of shareholders are not restricted in any way. Non-profit company – replacing the previous so-called sec. 21 company. Charitable or professional organisations, e.g. the FPI.
What are the types of for profit companies that can be created?
Personal liability company (Inc) - It is a (private, profit) company used mainly by professional practices. Directors are jointly and severally liable together with the company for all contractual debts and liabilities incurred during their term of office. Private company ((Pty) Ltd) – It is a profit company whose MOI prohibits the offering of shares to the public and restricts the transferability of its shares. Public company (Ltd) – Any company that is not a state-owned enterprise, a private company or a personal liability company. Shares may be offered to the public and are fully transferable (irrespective of whether it is listed on an exchange or unlisted). State-owned company (SOC) – National government business enterprise.
