Chapter 5: Forms of ownership Flashcards
Formation procedure
Some businesses have to be formally registered while do not, the more steps the costlier
Legal persona
If the business is registered it has legal personality and can enter into contracts and be sued
Business is also responsible for its own debt
Continuity of existence
If business is registered it has continuity of existence
Unlimited liability
Owners personal belongings can be taken to pay for debt of the business
Limited liability
Owners personal belongings cannot be take to pay for the debts of the business
Tax implications
If the business is a legal entity it will pay income tax (28% fixed)
If the owner is the legal entity then the owner will pay progressive tax(increases as the salary increases)
Management
If the business is not registered then there is no specification in the law as to how or who or how many people have to manage the business
If the business is registered then the law has certain demands on the management
Capital
Smaller business usually need less capital than larger scale businesses
Company
A legal entity that was registered under the Companies Act
Companies Act
- Encourages entrepreneurship
- Promotes economy
- Promote participation in different sectors of the economy
- Simplifies registration and managing a company
- Ensures that the rigths and obligations of shareholders are aligned with each other by making sure companies are managed appropriately
- Ensures NPOs are managed in a manner that will ensure that function effectively and responsibly
Types of profit companies
- Private ((pty) Ltd.)
- Personal liablity (inc)
- State owned(SOC)
- Public(Ltd)
Private company
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- Cannot be state-owned
- Memorandum of Incorporation (MOI) has to specify that shares are not available to the public and that:
- Shares are not negotiable or transferable
Public company
- Registered on the JSE
- Shares are available to the public
- When shareholder buys a share they become an owner and expect ROI
- ROI is in the form of dividends (profits shared between shareholders) or increase in share price
Blue-chip shares
- Shares in a company that have been proven to be low risk in the long term and are financially stable
- Shares that pay good dividends
Prescriptions of Companies Act 17 2008
- Name of business
- Formation procedure
- Prospectus
- Meetings
- Duties of directors
- Financial obligations
Name of business
Can have any name as long as:
* it isnt too similar to another
* Is not hateful/triggering
* Does not falsely imply association with something/someone
Formation procedure
- First pay appplication fee
- Fill out a Notice of Incorporation (NOI)
- Then register a MOI
- Must have a min of 1 shareholders and 3 directors
- Becomes a registered company once Registration Certificate is issued
Memorandum of Incorporation
MOI
- Document used to start a company
- Stipualtes the different kinds of shared that will issued
- Stipulates the rights and obligations of the shareholders
- Stipulate duties and responsibilities of the directors
*
Prospectus
- A written invitation to the public to buy shares
- Must be signed and dated by all directors
- Must indicate in the front that it’s registered
- Contains general and financial information from the past 3 years
- If its used to raise funds to buy property/business ventures the details of that transaction must be included
Meetings
- Meetings can either be attended in person, online or someone can be given a proxy to attend the meetings fro them
- 15 business days(10 for pty ltd) notice must be given before meeting
- 25% of shares with voting rights have to be present
Duty of the director
- Diretors are expected to act in the best interest of the business, be diligent, and display good faith
- They are obliged to disclose any personal or financial interests if they are accused of acting in the disadvantage of the business to gain personally
Financial obligation
- Submit AFS that meets requirements of IFRS then submit it to CIPC
If public company then - Must have AFS audited
- Must appoint secretary, internal auditor, and external auditor
- Do a solvency test to make sure assets outweigh liabilities
- Do a liquidity test to make sure company is ina position to pay debts that are due in the next 12 momths
Sole trader Advantages
- No legal requirements
- Quick decision making
- If business is making profits less than R272 01 then they are taxed a max of 25%
- if not a lot of capital is required than the iwner can manage on their own
Sole trader disadvantages
- Business has no legal persona
- Business has no Continuity of existence
- Business ha unlimted liability
- If the business makes more than R272 701 then their profits will be taxed at more than 28%
- No ideas to bounce off of
Partnership advantages
- No legal requirements for the formation
- More capital contribution
- less profit = less tax
- Delegation is possible and more input into decision making
Partnership disadvantages
- If agreement was made tacitly then it may be difficult to resolve issues in a court of law
- No legal persona
- Unliimited liabilty
- Decisions are made slower and may have more conflict
- more profit=more tax
Company advantages
*business has continuity of existence
* Business has legal persona
* Business has limited liability
* Capital contribution is large
* No matter how much profit you make (thats more than 272k) tax is still 28%
* Once its registered directors have to be appointed and thus business gains extra expertise adn skilsl
Company disadvantages
- Formation procedure is long and expensive
- If company makes less than 272k then tax is 285
