Forms of ownership

Question 1

List the different forms of ownership

Answer 1

• sole ownership
• partnership
• Close Corporation
• Companies
• Franchise

Question 2

What is sole ownership?

Answer 2

• The business is owned by one person.
• It is the oldest and most common form of ownership. - It is small and does not require a lot of capital.
• It is managed by one person.
• It is easy to start because there are very few legal formalities.
• All the assets and liabilities belong to the owner, therefore the owner is entitled to all the profits and is responsible for all the debts of the business.
• The owners liability is unlimited.
• Tax is paid according to the owners personal capacity. - The lifespan of the business is linked to the health of the owner.

Question 3

What is a partnership?

Answer 3

• A business that consists of a number of people (between 2 and 20)
• All the partners contribute: money, equipment or expertise.
• They combine these resources to aim at making a profit which they divide among themselves according to a ratio.
• They agree on ratio which determines how much profit each of them get. In the event of a loss, it will be shared between the partners according to the agreed ratio.
• The partners pay tax according to their personal capacity
• The partnership itself is not taxed
• Partners have unlimited liability
• Partners enter into a partnership agreement
• If one partner dies or leaves the business, the other partners have to enter into a new partnership

Question 4

What is a Close Corporation?

Answer 4

• A CC may consist of 1-10 members
• Identified by the CC at the end of the business name
• The CC has legal autonomy
• It is easy to form a CC

Question 5

How do you form a Close Corporation?

Answer 5

• Each member must contribute something to the business
• Each contribution is noted as a percentage
• Members complete and sign a founding statement
• This statement is then sent to Registrar of Close Corporations for approval
• When the registrar has approved the founding statement, the CC is registered and may begin operating

Question 6

What is company?

Answer 6

• A company that raises money by selling shares
• Must comply with legal requirements of the companies act and be registered with the registrar of companies
• Registration is a complex and expensive procedure and a lawyer is needed to assist in completing the registration process
• The company has legal autonomy
• Profits are divided among shareholders according to how many shares the shareholder has.
• The share of profits is called a dividend

Question 7

Name the different types of companies

Answer 7

• Private companies (Pty)Ltd

- Public companies Ltd

Question 8

What is a private company?

Answer 8

• Have between 1 and 50 members

- Shares may be bought and sold privately, with the consent of shareholders

Question 9

What is a public company?

Answer 9

• Any number of shareholders over 7
• Any member of the public can buy shares into the company
• Different companies are listed of different stock exchanges
• Establishing a public company is an extremely expensive and lengthy process

Question 10

What is a Franchise?

Answer 10

An agreement whereby one business with an excellent product sells rights to use the business name and sells its product or service to another person in accordance with various stipulations

Question 11

Name 3 characteristics of a franchise?

Answer 11

• The franchise owns a business and pays a certain percentage of the sales to the franchiser
• Entrepreneurial and management assistance is provided by the franchiser to the franchisee
• It is very expensive to buy a franchise

Question 12

What is a formal trader?

Answer 12

• A person who registers his business with the relevant authorities and SARS
• Tax is paid on each transaction on his profit
• A formal trader incurs more expenses than an informal trader
• They scout around for the best products at the best prices (assembling)
• The goods are then stored in warehouses (storage)
• The process of getting goods from the manufacturer to the wholesaler to the trader to the consumer is called distribution

Question 13

What is an informal trader?

Answer 13

• An informal trader doesn’t need a lot of Capital to start the business
• The business doesn’t need to be registered or include or charge VAT therefore SARS doesn’t benefit from this business
• He does however have to comply with the laws of the city
• This law protects shop owners from unfair competition
• An informal trader buys bulk goods, repackages them (assembling) and sells them at taxi ranks (distribution)
• If an informal trader does not sell all of his goods, he has to find a place to keep it till the next day (storage)

Question 14

What is legal autonomy?

Answer 14

The continuity of the business does not depend on the owners remaining the same. The owners have limited liability.

Question 15

What does limited liability mean?

Answer 15

The company is responsible for the debts and taxes of the business and the owners’ possessions may not be seized in the event of bankruptcy of the business