Business ownership (1) Flashcards
Define Audited financial statements?
Financial statements that have been examined by a registered auditor to assess whether or not the information in the financial statements presents the entity’s true state of affairs.
Define Corporation, incorporate, incorporators?
These all stem from the Latin root word, meaning ‘body’.
Therefore, a corporation would be a body incorporated by the incorporators.
Define Legal person or juristic person?
A social entity, community or an association of people that has an independent right of existence under the law (Davel and Jordaan, 2005).
Define Legal personality?
Is an inherent feature of a juristic person. It refers to the ability to be seen as a separate legal person, and therefore to be able to be the subject or the object of legal action.
Define Limited liability?
The protection given to directors and shareholders of a company where they are not personally responsible for the company’s losses. Their assets remain intact in the event of the company becoming insolvent.
Define Perpetual succession?
The continuation of an entity’s existence even after the death, bankruptcy or exit of its founders, directors, shareholders and employees. Only trusts, companies and close corporations enjoy this state, and it is subject to legal agreements.
Define Memorandum of Incorporation (MOI)?
The founding document that spells out the rules for the corporation, such as the number of meetings to be held per year, number of directors, limitations and restrictions of the director’s powers, and any other customised requirements.
Define Tax?
Monies levied on people and companies by the South African Revenue Service (SARS).
Define a sole trader and give its advantages and disadvantages?
Sole traders, also known as sole proprietorships, is a sole proprietorship is a business that is owned and operated by a natural person (i.e. an individual). The owner is taxed in his or her individual capacity, including tax on the profits made by the business.
Advantages:
- There is no need to register a name and trading can be done in a person’s own or fictitious name
- Bank accounts can be operated by the owner – i.e. there is no need for banking mandates and multiple signatories
- The owner takes all profits
- As the sole owner of the business, the owner makes all the decisions
- Simplicity of establishment and operation – i.e. no separate legal entity, and there are few, if any, legal requirements
- Disadvantages:
- Cannot reserve a unique name or brand
- Banks would be averse to granting loans to expand the business
- The owner assumes all risks
- The owner might lack the necessary skills
- A licence to trade in certain areas would be a constraint, plus attendant fees
What are the Dissolution of a sole trader?
There are no specific steps or regulations governing the dissolution of a sole trader. The sole trader may cease business at any time. If the business is registered for value-added tax (VAT) purposes (something which we will discuss in later units), a deregistration form should be submitted to SARS.
Define a partnership?
A partnership is a type of business entity where the owners, known as partners, share with one another the profits or losses of such business. The rules governing partnership fall under common legislation. SARS recognises that a partnership can accommodate between two or more persons in an unincorporated joint venture.
Advantages:
- Easy to establish with no statutory requirements – i.e. the necessity to have auditors prepare financial statements
- Banks are more inclined to provide finance
- It has a wider skill base than that of a sole trader
- Each partner has a personal interest in the business, and is therefore motivated to act in the best interests of the partnership
Disadvantages:
- Partners have unlimited liability – for instance, if a worker or a customer is injured during working operations, the partners should settle the claims out of their personal assets
- All partners are liable for all debts of the business – i.e. if one partner exercises bad judgement, all the other partners will have to bear the brunt
- A partnership is not a legal entity, and therefore has no continuity in the event of a partner’s death
- Decision-making and reaching a consensus are difficult to achieve
What are the three types of partnership?
- General or ordinary partnership
- Anonymous (sleeping) partnerships
- Commanditarian partnership
- General or ordinary partnership: Partners are jointly liable for the debts of the partnership.
- Anonymous (sleeping) partnerships: The anonymous partner is not known to the public, but nevertheless, shares in the risks and benefits of the business.
- Commanditarian partnership: The partner is purely a financial participant with a restricted liability – i.e. similar to a shareholder in a company. This partner shares in the profits and losses, but his or her liability is restricted to a specific contribution, or to an agreed amount.
Explain the Dissolution of a partnership?
A partnership is automatically dissolved if one of its partners is sequestrated, dies, or leaves the partnership. Any existing partnership agreement then becomes null and void, unless a special provision was made in the founding agreement.
Define a close corporation?
A simpler version of a private company, where the member or owners had a more direct management role, but would enjoy the benefits associated:
- limited liability,
- legal personality and
- perpetual continuity (its continuity is not affected by the change in its membership).
The owners of a CC are known as members. The minimum number of members is one and the maximum is ten. Members’ interest in the CC is not necessarily related to their initial contributions.
Advantages
- A CC was easy to establish and operate.
- A CC enjoys perpetual succession.
- Members have limited liability – i.e. they are generally not liable for the debt of the CC.
- Transfer of ownership is easy.
- It has fewer legal requirements than a private company.
- The members are both responsible for, management and operations.
- It is permissible for a CC to own shares in a company (although not in another CC).
Disadvantages:
- The number of members was restricted to a maximum of ten.
- There were more legal requirements than there are for a sole trader or partnership.
Although members of a CC are protected to a large extent against liability, in certain circumstances, they can be personally liable for debts and liabilities incurred, particularly in the case of reckless or negligent behaviour. A member can exit from the CC if?
- there is a voluntary disposal of interest;
- disposal is being forced due to insolvency or attachment;
- death occurs, in which case the interest can be disposed of in terms of a will;
- the CC is deregistered or liquidated; and/or
- by order of court, on the application of any member.
Define and explain a Trust?
A trust is a legal, binding agreement in which assets are transferred into the custody of named individuals (i.e. trustees) who then act as instructed, usually for the benefit of another individual, business or group.
Trusts are typically established for and behalf of?
- minors;
- people who cannot take care of their own affairs;
- people with indivisible assets;
- people who want to save tax;
- people whose assets grow faster than inflation;
- people with a complex family composition; and
- people who want to protect their assets.
Characteristics of a trust?
A trust does not enjoy legal personality benefits – i.e. it cannot sue or be sued. For tax purposes alone, it is considered a legal entity, and is therefore taxed according to the SARS tax tables.
A trust consists of?
- donor,
- trustee and
- beneficiary.
a ‘donor’ or ‘founder’ who transfers ownership, as well as control of assets to one or more trustees appointed to administer them. The trustees control the distribution of income to the beneficiary. In its simplest form, a trust has three parties involved – i.e. the donor, trustee and beneficiary.
What are the two types of trust?
- the inter vivos trust, which is created between living people, and
- the testamentary trust, which only comes into operation when the donor dies.
Briefly explain a business trust and its benefits?
A business trust has all the characteristics of an ordinary trust, with the additional function of being able to trade for profit, for the benefit of the beneficiaries named in the trust deed. The trustees may acquire more assets and all assets remain at risk from trading liabilities – i.e. if the business incurs a loss, the trust’s assets would have to be sold to make good on any commitments. Business trusts are not very common in South Africa – there is, for instance, no tax benefit to be gained, but it does serve a purpose if different parties hold land, property or other assets in common. They can be very useful for the protection of assets in the event of bankruptcy, divorce or death of one or more of the parties.
What are the advantages and disadvantages of trust?
Advantages
- Protects assets and interests of vulnerable parties
- No estate duties payable on the death of a party and avoids capital gains tax
- Finance for business trusts are more easily raised than for sole traders and partnerships
Disadvantages
- Onerous legal obligations – i.e. registration of trust deed
- Many administrative burdens; for example, financial statements have to be submitted to the Master of the High Court
- Minutes and resolutions of all meetings have to be retained
-Heavily taxed overall
What is a testamentary trust?
It comes into effect when a doner dies
Who get the profits of a trust?
Beneficiaries
Which Act allows for close corporations to be formed?
The closed corporation Act of 1984?
Name one of the biggest advantages of a closed corporation?
It has perpetual success (is the continuation of a corporation’s or other organization’s existence despite the death, bankruptcy, insanity, change in membership or an exit from the business of any owner or member, or any transfer of stock, etc.).
Explain the nature of a franchise?
The franchise agreement is the legal document covering the relationship between the two parties – i.e. the franchisor, who is expanding his or her original business, and the franchisee, who is looking to follow the success of a tried and tested business model.
