Chapter 14 - Forms of ownership

Question 1

Sole proprietor - Characteristics

Answer 1

• 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.

Question 2

Sole Prop - impact

Answer 2

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.

Question 3

Partnership - Characteristics

Answer 3

• 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.

Question 4

Partnership - impact

Answer 4

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.

Question 5

Private Company - characteristics

Answer 5

• 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.

Question 6

Private Company - Impact

Answer 6

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.

Question 7

Public Company - Characteristics

Answer 7

• Requires three or more directors and one or more shareholders.
• The name ends with Ltd.
• Public can buy shares in company

Question 8

Public Company - Impact

Answer 8

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.

Question 9

SOC - Characteristics

Answer 9

• 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.

Question 10

SOC - Impact

Answer 10

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.

Question 11

Success of partnership in terms of capacity

Answer 11

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.

Question 12

Success and failure of partnership ito management

Answer 12

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.

Question 13

Success and failures of partnership ito capital

Answer 13

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.

Question 14

Success / Failures of partnerships ito legislation

Answer 14

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.

Question 15

Success and failures of partnerships ito Taxation

Answer 15

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.

Question 16

Success/ Failure of Partnership ito division of profit

Answer 16

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.

Question 17

Success/ Failure of Public Company ito capacity

Answer 17

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.

Question 18

Success / Failures of Public Company it management

Answer 18

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.

Question 19

Success/ Failures Public Company ito Capital

Answer 19

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.

Question 20

Success / Failures Public Company ito legislation

Answer 20

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.

Question 21

Success/ Failures of public company ito Taxation

Answer 21

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.

Question 22

Success/ Failures of Public Companies ito Division of Profit

Answer 22

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.

Question 23

Success/ Failures of Private Company ito capacity

Answer 23

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.

Question 24

Success/ Failures of Private companies ito management

Answer 24

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.

Question 25

Success/ Failures of Private company ito Capital

Answer 25

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.

Question 26

Success/ Failure of private company ito legislation

Answer 26

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).

Question 27

Success/ Failures of Public Company ito Taxation

Answer 27

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.

Question 28

Success/ Failures for Private Company ito division of profits

Answer 28

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.

Question 29

Success/ Failures of Sole Prop ito Capacity

Answer 29

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.

Question 30

Success/ Failures of Sole Prop ito Legislation

Answer 30

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.

Question 31

Success/ Failure of Sole Prop ito Taxation

Answer 31

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.

Question 32

Success/ Failure of Sole Prop ito Capital

Answer 32

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.

Question 33

Success/ Failure of Sole Prop ito Management

Answer 33

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.

Question 34

Success/ Failure of Sole prop ito Division of Profit

Answer 34

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.