Forms of ownership Flashcards
Definition - sole proprietor
When the owner does business without registering as a company.
Suitable for smaller enterprises.
Natural person.
Characteristics - sole proprietor
- Owned and managed by single owner.
- Simply the owner doing business.
- Not legal entities.
- Assets and profit belongs to the owner.
Advantages - sole proprietor
- Owner can simply start doing business.
- Runs business as he sees fit.
- Doesn’t need anyone else’s permission to make business decisions.
- Success of the business belongs to the owner.
Disadvantages - sole proprietor
- Owner contributes only his skills, time, energy
- No continuity - business cannot continue if owner retires / dies.
- Capital is limited to amount of money the owner has access to.
- The owner has unlimited liability for the debt.
Definition - partnership
- Owners do business without registering as company.
2. Number of partners depends on nature and size of partnership.
Characteristics - partnership
- Agreement between two or more persons.
- Each partner makes contribution to partnership
- Partnerships are not legal entities.
- Partners are jointly and severally liable for debts
- Profits and losses are shared among partners according to the partnership agreement.
Advantages - partnership
- Responsibilities are shared
- Partners can specialise in what they do best.
- Expenses of partnership are shared among partners.
- Partners can consult each other regarding decisions
Disadvantages - partnership
- Partners do not always agree
- One partner’s bad decision can lead to losses for the partnership.
- Partners are bound by the decisions of other partners
- There is no continuity
- Partners have unlimited liability for the debt
Definition - close corporations
- Registered business with a membership of 1 - 10 persons
2. Specially created for smaller businesses.
Characteristics - close corporations
- Owned and managed by 1 - 10 members
- Name must end with words Close Corporation or CC
- CC have continuity
- CC are legal entities
- Assets belong to the CC and not its members
- Profits belong to the CC and not its members
Advantages - CC
- Members have limited liability for the debts of the CC
- Appropriate for small and medium businesses
- Usually has greater access to capital
- Financial statements need not be audited.
Disadvantages - CC
- Capital is limited to the contribution of up to 10 members
- All members of CC must give approval if a member wishes to sell interest.
Future - CC
- New Companies Act (Act No 71 of 2008) doesn’t make provision for formation of new CC.
- All existing CC may continue to exist indefinitely
- Existing companies may not be converted into CC
- Existing CC will be treated as private companies.
Definition - Private company
- Exist to make profit.
2. May not offer its securities to the public.
Characteristics - private company
- Name must end with Proprietary Limited or (Pty). Ltd.
- Owned by shareholders
- Minimum number of shareholders = 1
- Managed by directors
- Minimum number of directors = 1
- Securities not offered to the public.
- If a shareholder wishes to sell his shares, these shares first have to be offered to existing shareholders.
Advantages - private company
- More capital can be raised by a company
- Continuity of existence
- Not necessary to appoint an auditor, audit committee or company secretary
- Not necessary to hold annual general meetings.
Disadvantages - private company
- Restricted from raising funds directly from the public
2. Costs and formalities associated with forming a private company
Definition - public company
- Exist to make profit.
2. May offer its securities to the public
Characteristics - public company
- Name must end with Limited or Ltd.
- Owned by shareholders
- Minimum number of shareholders = 1
- Managed by directors
- Minimum number of directors = 3
- Securities may be offered to the public.
Advantages - public company
- Shareholders have limited liability for the debt.
- Funds may be raised directly from the public by offering securities
- Continuity of existence
- Companies can raise more capital
Disadvantages - public company
- Poor performance by a public company may lead to management losing their jobs.
- Annual general meetings must be held
- Complicated process to incorporate a public company
- An auditor, audit committee and company secretary must be appointed
