Business: Forms Of Ownership

Question 1

Forms of ownership

Answer 1

refers to the STRUCTURE of a business and the RELATIONSHIP between owners.

Question 2

form
of ownership that will best suit
them, before the business is opened.
The decision influences:

Answer 2

• Amount of administration before the
business can open;
• How legal issues will be dealt with;
• Who is responsible for paying debts;
• Who owns what.

Question 3

DIFFERENT FORMS OF OWNERSHIP

Answer 3

Sole Trader
Partnership
Close Corp
Public and Private company

Question 4

Sole trader
Nature

Answer 4

One person owns the
business and is responsible
for the entire business
operation
may employ people
to manage the business
Owner receives all profits

Question 5

Sole Trader
Advantages

Answer 5

1. No registration needed
2. Ideas & changes can be
   implemented easily
3. Do not have to register for
   or charge VAT
4. Can offer specialized
   products/services
5. Can run the business from
   anywhere
6. All profits belong to owner

Question 6

Sole trader
Disadvantages

Answer 6

1. Not a legal entity, owner is
   responsible for all the
   debts incurred & taxes
2. It is difficult to get finance
3. Very demanding for one
   person to run business
4. High risk
5. It is difficult to compete
   with larger businesses
6. There is no continuity
7. All losses suffered by
   owner

Question 7

Partnership
Nature

Answer 7

A minimum of 2 and a
maximum of 20 people can
form a partnership
There is a partnership
agreement that stipulates
the role of each partner
The profit/loss is shared
amongst partners

Question 8

Partnership
Advantages

Answer 8

1. It is simple to form
2. More than one person
   brings resources and
   expertise to the table
3. Partners share
   responsibilities
4. Partners share profit and
   losses

Question 9

Partnership
Disadvantages

Answer 9

1. Not a legal entity,
   partners share unlimited
   liability
2. Partners are taxed
   personally
3. One partner may work
   harder, unfair
4. If partnership ends, there
   may be solving disputes
5. Partnerships between
   friends or family often
   destroy relationships

Question 10

Close corp
Nature

Answer 10

Minimum 1 and maximum 10
members can form a CC by
drawing up a founding
statement
No new CC’s can be
registered in South Africa
Business is a legal person
(members separated from
business)
Members hold interest in the
business (a % share)

Question 11

Close corp
Advantages

Answer 11

1. There is limited liability
2. The business is held
   liable for debts (legal
   entity)
3. Annual General Meeting
   or audit, not required
4. There is continuity. If a
   member leaves, draw up
   a new founding statement
5. It is easier to raise capital
   than sole trader or
   partnership

Question 12

Close corp
Disadvantages

Answer 12

1. New CC’s are no longer
   registered
2. The registration must be
   renewed annually
3. The members are
   restricted to 10
4. Pay tax on profit (same as
   companies)

Question 13

COMPANIES

Answer 13

Shareholders are the owners of the company,
each with an interest in sharing the profits.
A Board of Directors is appointed to run the business on
shareholders’ behalf.

Question 14

Public company
Nature

Answer 14

Big organisations with a
large capital
Regulated strictly by
Companies Act of 2008
Shares sold to the public
and traded on the Stock
Exchange
Have the abbreviation “LTD”
after their name. This means
that liablity is limited

Question 15

Public company
Advantages

Answer 15

1. Shareholders can’t lose
   private assets if company is
   in financial difficulty
2. Access to public funding
   by selling shares
3. Can retain talent by giving
   shares to key employees
4. Being listed on the stock
   exchange enhances the
   brand name
5. Company growth attracts
   foreign investors

Question 16

Public company
Disadvantages

Answer 16

1. Must uphold market
   expectations
2. Many legal requirements
3. Must be audited and have
   Annual General Meeting
4. Market conditions cause
   share prices to rise and fall
5. To list a company can take
   3 months – 2 years
6. Pay tax on profit
7. Financial statements are
   public knowledge

Question 17

Private company
Nature

Answer 17

Smaller than public
company and cannot sell
shares to public
Formed by 1 – 50 owners
Regulated strictly by
Companies Act of 2008
Have abbreviation “PTY
LTD” after their name and
liability is limited

Question 18

Private company
Advantages

Answer 18

1. Shareholders have
   limited liability
2. Easy to transfer shares
   between owners, thus
   continuity
3. It is easier to raise capital
   than Close Corporation
4. Financial statements are
   not public knowledge
5. Can be adapted to small
   or large business

Question 19

Private company
Disadvantages

Answer 19

1. Many legal requirements
2. Must be audited and have
   Annual General Meeting
3. Shares may not be offered
   to public to raise funds
4. It cannot be registered on
   the Stock Exchange
5. There is a limited number
   of shareholders
6. Pay tax on profit