Chapter 14 - Forms of ownership Flashcards
Business Ventures
1
Q
Sole proprietor - Characteristics
A
- A sole trader is a business that is owned and managed by one person.
- A sole trader has limited company for expansion and lacks continuity of existence.
- Responsible for all the financial/ management decision.
2
Q
Sole Prop - impact
A
Advantages
- Easy to control since it is a small business.
- One owner so there is no disagreements.
- Can make quick decisions without having to consult others.
Disadvantage
- Difficult to continue and grow long term.
- Owners has to rely on own decisions and could make incorrect ones.
- If profits get too big may end up paying high tax in personal capacity.
3
Q
Partnership - Characteristics
A
- There is no limitation on numbers of partners.
- The partnership does not pay income tax, only the partners in their personal capacities.
- Jointly liable for legal/financial/ethical problems.
4
Q
Partnership - impact
A
Advantages
- Partners are actively involved in. management and may use the ideas of other partners.
- Not all partners need to be actively involved in management and would rather appoint competent managers.
- Easy and expensive to establish/partners must draw up partnership agreement.
Disadvantages
- Decision making can be time consuming as all partners have to be in agreement.
- Some management tasks may be neglected, as one partner may leave it to others to complete.
- Partners may disagree on how to run the business, which may lead to tension between them.
5
Q
Private Company - characteristics
A
- The company name ends in (PTY) Ltd.
- Public cannot buy shares in a private company
- Limited liability, jointly shareholders and is a separate legal entity.
6
Q
Private Company - Impact
A
Advantages
- Can obtain tax rebates if they are involved in SCI projects.
- Capital can be increased by getting more shareholders.
- The company and its owners (shareholders) are separate entities, which may encourage more people to join the company.
Disadvantages
- Shares are not freely transferable, so less capital can be raised.
- If the company fails to attract financially strong shareholders, it may hamper its growth opportunities.
- Directors may not have a direct interest in the company, which can hamper growth and profit maximisation.
7
Q
Public Company - Characteristics
A
- Requires three or more directors and one or more shareholders.
- The name ends with Ltd.
- Public can buy shares in company
8
Q
Public Company - Impact
A
Advantage
- The business has its own legal identity.
- Easy to raise funds for growth through the sale of shares.
- Can appoint a knowledgeable board of directors.
- It is easy to buy and sell shares.
Disadvantage
- Large capacity of the company can also lead to its downfall in that structure.
- Large structure can result in decision making taking time. become too costly.
- Subject to double taxation e.g. shareholders pay secondary tax this can have a negative impact to a company that is already financially struggling.
9
Q
SOC - Characteristics
A
- The company name ends with SOC.
- Profits are distributed to all sectors.
- Offer essential services which may not be offered by the private sector.
- Requires three or more directors and one or more shareholders.
10
Q
SOC - Impact
A
Advantages
- Profits are distributed to all sectors.
- Profits may be used to finance other state departments/reduce taxes.
- Offer essential services which may not be offered by the private sector.
Disadvantages
- May result to poor management as government is not always as efficient as the private sector.
- A lack of incentive for employees to perform if there is no share in the profit.
- Often rely on government subsidies.
11
Q
Success of partnership in terms of capacity
A
Capacity
Success
- Simple to establish a partnership entity.
- Encourages expansion as more partners join the business.
Failures
- In large partnership, the partners may struggle to agree on business issues.
- The more partners in the partnership, the more difficult it is to control expenses and partners’ drawings.
12
Q
Success and failure of partnership ito management
A
Management
Success
- Partners are actively involved in management and may use the ideas of other partners.
- Not all partners need to be actively involved in management and would rather appoint competent managers.
- Partners have access to expertise of other partners when tough decisions have to be made.
Failures
- Decision making can be time- consuming as all partners have to be in agreement.
- Some management tasks may be neglected, as one partner may leave it to others to complete.
- Partners may disagree on how to run the business, which may lead to tension between them.
- Partners are agents of the partnership and bad management decisions may be forced onto other partners.
13
Q
Success and failures of partnership ito capital
A
Capital
Success
- Partnerships can be financially strong because many partners contribute.
- Smooth cash flow as there is enough working capital.
Failures
- Partners may lose their capital contribution if the business fails.
- Partners don’t contribute skills which might be unfair to partners who also have skills.
- Partners may not all have capital to put into business when needed.
- Unequal inputs as some partners put in expertise instead of cash.
14
Q
Success / Failures of partnerships ito legislation
A
Legislation
Success
- Easy and expensive to establish/partners must draw up partnership agreement.
- Partnerships may apply for local tenders.
- Partners are more motivated to make a success because their personal possessions are at risk.
Failures
- An oral agreement may create problems for partners in future which can affect its success.
- Partners are jointly and severally liable for business debts.
- Unlimited liability/ partners are jointly and severally liable for the debts of the business.
- If one partner dies or retires, the remaining partners need to draw up a new agreement.
15
Q
Success and failures of partnerships ito Taxation
A
Taxation
Success
- Partnerships pay VAT only on relevant products sold/services rendered which reduces tax administration.
- The partnership does not pay income tax, only the partners in their personal capacities.
Failure
- Failure to comply with tax regulations by one or more partners may lead to business closure.
- Individual tax paid by partners on income earned is higher than fixed tax rate percentage paid by companies/close corporations.
- High-earning partners pay more tax, which may discourage other partners from joining the partnership.
- Partners may withdraw more cash to reduce their tax burden which may cause cash flow problems for the partnership.
16
Q
Success/ Failure of Partnership ito division of profit
A
Division of profits
Success
- Partners share profits according to their contributions.
Failure
- Amount of work done may not be equal to the amount of profit that each partner receives.
17
Q
Success/ Failure of Public Company ito capacity
A
Capacity
Success
- Can raise large amounts of capital as shares/ debentures can be sold to the public/shareholders.
- Share capital clause in the Memorandum of Incorporation (MOI) may be changed to issue more shares.
- May attract financially strong investors if share value increases/remain stable.
Failure
- Very costly to maintain infrastructure and large employee base.
- Large amounts of capital required to start a public company.
- Large capacity of the company can also lead to its downfall in that structures and processes may become too costly.
18
Q
Success / Failures of Public Company it management
A
Management
Success
- Management is in the capable hands of a board of directors who have skills/knowledge/ abilities.
- Shareholders can vote for/appoint the most capable directors to manage their company.
Failure
- Directors may not have a direct interest in the company, which can hamper growth and profit maximisation.
- Large management structure can result in decision making taking time.
- Directors’ fees increase the company’s expenses which reduces net profit.
- Management may open to legal challenges if their reports do not comply with King Code 111.
19
Q
Success/ Failures Public Company ito Capital
A
Capital
Success
- Can raise large amounts of capital as shares/ debentures can be sold to the public/shareholders.
- Amount of shares available can be increased to raise capital.
Failures
- Shareholders are entitled to see a company’s financial statements which impacts on the privacy of the company.
- Growth is limited if sufficient capital cannot be raised.
- Share prices change all the time and can lose their value.
20
Q
Success / Failures Public Company ito legislation
A
Legislation
Success
- The company and its owners (shareholders) are separate entities, which may encourage more people to join the company.
- Limited liability allows for greater risk taking, which may lead to growth of the business.
- Auditing of financial statements, gives shareholders the assurance that the business is being properly managed.
Failures
- Formation procedures are time consuming/complicated/ expensive, as many legal documents need to be prepared/submitted.
- High formation/establishment expenses require large start-up capital.
- Annual audit of financial statements is costly.
- If a public company does not comply with legislation, its licence maybe withdrawn by the Companies and Intellectual Property Registration Office (CIPRO)/Companies and Intellectual Property Commission (CIPC.
21
Q
Success/ Failures of public company ito Taxation
A
Taxation
Success
- Can obtain tax rebates if they are involved in SCI projects.
- Can obtain government tenders and renew their licenses if they do not evade tax.
Failure
- Subject to double taxation e.g. shareholders pay secondary tax this can have a negative impact to a company that is already financially struggling.
22
Q
Success/ Failures of Public Companies ito Division of Profit
A
Division of profits
Success
- Profits could be split between company and shareholders.
- Shareholders receive return on investment, when dividends are paid out according to the type and number of shares held in the company.
- Large profits may be used for expansion/kept in a reserve fund for future growth.
Failures
- Dividends are not always paid out which may discourage new investors.
- Subject to double taxation e.g. shareholders pay secondary tax this can have a negative impact to a company that is already financially struggling.
23
Q
Success/ Failures of Private Company ito capacity
A
Capacity
Success
- Large amount of capital can be raised since there is no limit on the number of shareholders.
- The company can access long term capital and therefore has good long term growth opportunities.
Failures
- It cannot grow into a very large business since it cannot invite the public to buy shares.
- Restrictions on transferability of shares may discourage people from joining the company.
- If the company fails to attract financially strong shareholders, it may hamper its growth opportunities.
24
Q
Success/ Failures of Private companies ito management
A
Management
Success
- Management is in the capable hands of a board of directors who have skills, knowledge and abilities.
- Shareholders can vote for/appoint the most capable directors to manage their company.
Failures
- Shareholders have the power to elect suitable directors, but not all shareholders exercise their voting rights.
- Directors may sometimes act in their own best interests, not in the company’s best interests.
25
Success/ Failures of Private company ito Capital
**Capital**
**Success**
* Even though shares are not freely transferable, large private companies can raise considerable amount of capital.
**Failures**
* Large amount of capital cannot be obtained because capital contribution is only limited to private shareholders.
26
Success/ Failure of private company ito legislation
Legislation
**Success**
* Procedures to form a private company have been simplified by the new Companies Act 71 of 2008.
* Limited liability allows for greater risk taking, which may lead to growth of the business.
* Auditing of financial statements (if required), gives shareholders the assurance that the business is being properly managed and supports raising additional finance.
* There is no longer a limit on the number of shareholders in a private company.
* A private company can benefit from government programmes if they comply with the relevant legislation.
* Personal liability of share-holders does not affect the company's assets.
**Failure**
* Formation procedures are time consuming/complicated/ expensive, as many legal documents need to be prepared/submitted.
* High formation/establishment expenses require large start-up capital.
* Annual audit of financial statements (if required) is costly.
* If a private company does not comply with legislation, its licence maybe withdrawn by the Companies and Intellectual Property Registration Office (CIPRO)/Companies and Intellectual Property Commission (CIPC).
27
Success/ Failures of Public Company ito Taxation
Taxation
**Success**
* Can obtain tax rebates if they are involved in SCI projects.
* Can obtain government tenders and renew their licenses if they do not evade tax.
**Failure**
* Subject to double taxation e.g. shareholders pay secondary tax this can have a negative impact to a company that is already financially struggling.
28
Success/ Failures for Private Company ito division of profits
Division of profits
**Success**
* High profits and good returns to shareholders indicate the success of a company, which increases the value of shares.
* Profits generated can be re-invested to expand business operations.
* Shareholders receive profits according to the type and number of their shares.
**Failures**
* Shareholders may sell their shares when dividends are low, resulting in a drop in share prices.
* Dividends are not always paid out which may discourage new investors.
29
Success/ Failures of Sole Prop ito Capacity
Capacity
**Success**
* Easy to control since it is a small business.
**Failures**
* Difficult to continue and grow long term.
* Difficult to get good, well-trained staff as they are expensive.
* Owner has to manage and carry out all business functions.
30
Success/ Failures of Sole Prop ito Legislation
Legislation
**Success**
* No registration required to establish this business.
* Expensive annual audit of financial statements is not required.
* Unlimited liability may encourage the owner to work harder to ensure the success of the business.
**Failure**
* Personal debts and business debts are one.
* Must comply with relevant municipal regulations to avoid closing down.
* The owner is personally liable for the business debt; he/she may be reluctant to take calculated risk.
31
Success/ Failure of Sole Prop ito Taxation
Taxation
**Success**
* Owner only taxed on profits in personal capacity.
* Depending on how much income the owner earns, his/her tax rate may be lower than the company tax rate.
* If the owner earns below a certain threshold amount per year, no income tax is payable and the business’s profits are thus not taxed.
**Failure**
* If profits get too big may end up paying high tax in personal capacity.
* Failure by the owner to comply with personal income tax regulations could lead to substantial financial penalties imposed by SARS.
32
Success/ Failure of Sole Prop ito Capital
Capital
**Success**
* Capital can be carefully spent and managed.
* The owner may be able to borrow money from a financial institution, especially if he/she has assets that can be used as surety for a loan.
**Failure**
* Limited capital available for expansion.
* Cannot appoint people with large salaries.
* Owner responsible for any capital borrowed.
33
Success/ Failure of Sole Prop ito Management
Management
**Success**
* One owner so there is no disagreements.
* Can make quick decisions without having to consult others.
**Failure**
* Owner has to do all the administration, management and decision-making in the business.
* Owners has to rely on own decisions and could make incorrect ones.
34
Success/ Failure of Sole prop ito Division of Profit
Division of profits
**Success**
* Owner receives all profits from the business which can lead to capital growth.
**Failure**
* Owner needs to budget carefully so that business debts are covered.
* If the owner does not make a profit, the income and livelihood of the owner may be severely affected.
