Introduction Flashcards
Why must one choose how to structure their business?
How one chooses to structure their business has several repercussions concerning legal, financial and personal liability. In South Africa, there are five established forms of business structures.
What are the five established forms of business organisations?
1) sole trader/proprietorship
2) partnership
3) company
4) close corporation
5) business trust
Elaborate more on a 1) sole trader/proprietorship
A single investor personally owns all of the assets of the business and is personally liable for all of the debts and liabilities of the business. They alone are in charge of the business. No employees are liable for the debts of the business. If they run into debt, their personal assets may be seized to cover the debt. A disadvantage of this business structure is that there is limited potential for growth and no prospect of legal succession. When the sole trader dies, so too does the business. Furthermore, sole traders pay higher tax rates, but they do not get audited.
Elaborate more on a 2) partnership
A number of investors (min. 2 max. unlimited) together as joint co-owners own the assets of the partnership and are ultimately jointly and severally liable for the debts of the partnership. It is created by a partnership agreement. All the partners manage the business and share in the net profits of the business. A partnership does not have a separate legal personality, and immovable assets must be registered in the partners’ names. The share of the profits earned by each partner is either pre-determined, or it is dependent on their capital contribution, or if this cannot be determined, it is divided up equally. All partners have to make a capital/skill contribution. A partnership does not have legal succession. The exit of any one of the partners results in the dissolution of the partnership and the creation of a new one. They also do not get audited.
Elaborate more on a 3) company
The company is a separate legal person and its shareholders, as a general principle, have limited liability. This means that the assets of even a one-shareholder company belong to the company, and not to the shareholder(s). Hence, a company may be sued and sue in its own name and creditors cannot claim payment from shareholders or members of the company. Companies have legal succession and continuity i.e. they are not affected by the gain or loss of shareholders. A company only ceases to exist when it is wound up. Public companies raise capital by selling shares on the stock market. A company is managed by a board of directors, which eases the burden of management on the shareholders. Also, companies are taxed significantly less (28%) than sole traders/partnerships (40%).
Formation of a company requires significant legal compliance, such as registering with the Companies Commission. Furthermore, a company requires a constitution known as the Memorandum of Incorporation. Lastly, companies are subject to extensive regulation requirements concerning transparency and accountability. All public companies must have their financial statements audited and some private companies must be audited if their public interest score is over a certain number.
Elaborate more on a 4) close corporation
This structure is very similar to a company but with some essential differences. It closes the gap between a sole trader, a partnership and a company. There are no shares in a CC, nor a board of directors. Membership is limited to a max. of 10 people. A company cannot be a member of a CC. All members have a say in the management of the corporation. It is essentially a watered down version of a company. It must still be registered with the Companies Commission and its financial statements also need to be audited if the public interest score is over a certain number. No new CCs may be formed, and nor may any conversions from companies to CCs take place. However, there are still shelf CCs available.
Elaborate more on a 5) business trust
Although not a separate legal person, a business trust does enjoy the benefits of separate legal personality and limited liability. Under the Companies Act of 2008, a trust is considered a juristic person with separate legal personality. A trust is generally created for the preservation of wealth, and the protection of assets from creditors. The founder of a trust must determine what the object of the trust is. The trustee must administer the trust in accordance with the object of the trust. Trusts cannot be used to pay creditors. A trust is less heavily regulated i.e. it does not need to be audited. The beneficiaries of a trust may be more than 10 people.
