Legal forms of business Flashcards
Legal forms of business (5)
- sole trader
- the partnership
- the close corporation
- the company
- a franchise
Sole trader
- an individual that conducts business in a personal capacity. Such an individual usually trades under his/her personal name and is a ‘one man show
Advantages of a sole trader
▪ Establishing the business is easy and inexpensive
▪ The law does not require any formal registration or the completion of any formal documents.
▪ All the profit goes to the owner.
▪ Should the business close down, the winding-up process is easy and inexpensive
▪ Motivational factor is very high: self interest motivates success
▪ Owner owns all the assets
Disadvantages of a sole trader
▪ There is no legal distinction between the business owned assets and the individuals assets.
▪ Owner is liable in a personal capacity for settling all debts of the business
▪ The owner has to carry all the financial loss
▪ The business has no status on paper
▪ Expansion of the business is limited
▪ Continuity of the business is poor
The partnership
An agreement set up in writing by a minimum of 2 people
Advantages of a partnership
▪ Partners share the workload and pressure
▪ Partners share responsibility for all debt or losses incurred.
▪ More capital can be raised for expansion.
▪ Easy way of eliminating competition as forces are combined
▪ Wide range of knowledge and skills can be combined
▪ Ill health of a partner does not affect the continuity of the partnership
▪ Only legal requirement is a written contract between all parties involved.
Disadvantages of a partnership
▪ Partners are jointly and severally liable for any/all debt incurred by any of the partners.
▪ Drafting a comprehensive partnership agreement can be costly.
▪ All partners are taxed as private individuals.
▪ Death or bankruptcy of any of the partners will result in the partnership agreement being dissolved.
The close corporation
A business entity that is initiated by a minimum of 1 person, called a member but up to a maximum of 10 people called members
Advantages of a close corporation
▪ Legal requirements needed are not as complicated and expensive.
▪ Members enjoy a position of limited liability for the debt of the CC.
▪ The members share in the after-tax profit of the CC according to their % interest.
▪ The CC is taxed according to the company tax table and the members are taxed as private individuals on the
income they receive.
Disadvantages of a close corporation
▪ Only individuals may become members of a CC.
▪ There is a limit to the amount of capital that can be raised.
▪ Profits are shared
▪ Need audited books in order to apply for a loan.
The company
A very powerful separate legal entity that is owned by shareholders. The number of shareholders
depends on the type of company.
Types of companies
a) Private company: Name ends in (Pty) Ltd
b) Public company: Name ends in Ltd. Listed on stock exchange for public to by shares
Advantages of a company
▪ There is no limit to the capital that can be raised to expand
▪ Death of a director will not affect the continuity of the company
▪ Have a high status level in the business world
▪ Voting rights are proportional to the number of shares a shareholder owns.
▪ A portion of the profits is distributed as dividends per share held.
Disadvantages of a company
▪ Registering a company is very costly, time-consuming and complex.
▪ A board of directors manages a company
▪ As an employee, you pay PAYE
Advantages of a franchise
▪ Success is guaranteed
▪ Business has an instant corporate image
▪ Back-up support is provided should there be any administrative problems.
▪ Marketing costs are shared amongst all the franchises in the group which ensures they are marketed
extensively
Disadvantages of a franchise
▪ Acquiring a franchise can be expensive
▪ The business is never really yours
▪ Rules and regulations set out by the franchiser must be adhered to
▪ Provision is not always made for changing consumer needs
▪ All profits are shared with the franchiser.
