L10 l Overview of FORMS OF OWNERSHIP Flashcards
What are the different Forms of Ownership or Legal Entities?
Sole trader / sole proprietorship
Partnership
Legal Persona
refers to the legal right of a business or person to enter into contracts, own property and sue or be sued.
Liability (for the debt of the business)
Liability refers to what or who (the business or owner) will take responsibility for the debt of the business.
Tax Implications
This refers to who will be responsible to pay the tax on the profits –the owner or the business.
Continuity
❀ A business will only have continuity of existence if the business is a legal entity separate from the owners, i.e. the business is registered.
❀ If the business has continuity, the death or retirement of the owners will not affect the existence of the business.
Management and Control
The owner of the business has to decide if he/she would like to be involved in the day-to-day running of the business.
Capital – the size of the business
- Capital refers to the amount of money needed / used for the establishment and working the business.
Formation Procedures
refer to the different measures a business needs to go through to be established.
Characteristics of a Sole Trader?
A sole trader is a business owned by one person.
The owner of the sole trader will contribute all the capital by giving his/her own money or borrowing money in his/her personal capacity.
A sole trader is often chosen as a form of ownership by someone who has capital and a special skill to start a business. Sometimes a special skill is carried over from generation to generation namely, the parent is a baker and teaches the child how to bake and the child then takes over the business.
The business is not a separate legal personality, because a sole trader cannot be registered. This means the owner is the legal person and will enter into contracts on behalf of the business in his/her personal capacity.
The fact that the business is not a separate legal entity, means that the owner will take full responsibility for the debt of the business – i.e. the owner has unlimited liability and could lose his/her personal belongings if the business fails.
The business does not have continuity, i.e. if the owner dies / retires, the business will not continue to exist.
The owner pays tax on the profits generated by the business. South Africa has a progressive tax system, which means the higher the income, the higher the percentage of tax that the owner will have to pay (max 45%).
Advantages of a Sole Trader
Formation procedure - No costs are involved as the business is not registered.
Number of owners = 1 - Takes all the profit, so the harder he/she works, the more profit he/she will get.
Management and control - Quick decision-making, do not have to ask for input from others.
Tax - If the profit is relatively low, the rate at which the owner will be taxed on the profit, could be low.
Disadvantages of a Sole Trader
Formation procedure - ❀ The business cannot be registered, so there is no separation between the owner and the business. ❀ This means the owner has unlimited liability for the debt of the business.
Number of owners = 1 - The owner has to carry all responsibilities.
Management and control - The owner has to rely on his/her own initiative and does not have somebody to discuss decisions with.
Tax - If the profit is high, the tax rate will be higher than 28%.
Continuity of existence - There is no continuity of existence, because there is no separation between the owner and the business.
Characteristics of a Partnership
- A partnership is a verbal, written or even tacit (implied) agreement between at least two, but no more than 20 people to combine their money and skills in a business.
- Profits and losses will be shared amongst the partners according to a specific ratio as agreed upon in the partnership agreement.
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