Topic 10 Forms of Ownership Flashcards

1
Q

Define a Profit Company

A

A business whose aim is to generate profit from the regular operations.

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2
Q

Define a Non-Profit Company

A

a company incorporated for public benefit.

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3
Q

Partnership:

A

an agreement between two or more parties that have agreed to finance and work together in the pursuit of common business goals.

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4
Q

Co-operative society:

A

a voluntary association started with the aim to meet
their common economic/social needs/aspirations through a jointly-owned and democratically-controlled enterprise.

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5
Q

Company:

A

a type of business structure that has a separate legal entity from its owners.

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6
Q

Public company:

A

a company whose shares are traded freely on a stock exchange.

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7
Q

Private company:

A

a company whose shares may not be offered to the public for sale.

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8
Q

State-owned company:

A

a legal entity that is created by the government
to participate in commercial activities on its behalf.

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9
Q

Prospectus:

A

a document inviting the public to buy securities/shares.

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10
Q

Annual General Meeting (AGM):

A

a meeting is held once a year where the shareholders receive a report stating how well or poorly the company
has done.

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11
Q

Directors:

A

people elected to the board of a company by the shareholders to represent the shareholders’ interests.

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12
Q

Audit:

A

a process where financial statements of the business are checked to confirm that they are correct.

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13
Q
A
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14
Q

Outline the forms of ownership and classify them into
Profit and Non-profit organisations/companies

A
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15
Q

Outline/explain the differences between
Profit and Non-profit organisations/companies

A
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16
Q

Discuss
Sole Trader

A

Define:
A sole trader is a business that is owned and managed by one person.

Characteristics
🥸 There are no legal requirements regarding the name
of the business.
🥸 Legally, the sole trader and the business are not
separate entities.
🥸 A sole trader may be started without performing
any legal formalities/registration.
🥸 There may be some persons to help but ultimate
control lies with the owner.
🥸 The owner has a personal interest in the
management and the services that are rendered.
🥸 The owner has unlimited liability.
🥸 The business dissolve when the owner dies. (no continuity)

Advantages
✅ It is easy and quick to form a sole trade as there is less capital needed.
✅ The owner can take quick decisions as and when required and has
full control.
✅ The owner can take steps to eliminate wastages of any kind.
✅ All the assets of the business belong to the owner personally.
✅ The owner takes all of the profits made by the business and is entitled to the
ownership of assets.
✅ There is personal encouragement and personal contact between the owner
and customers.
✅ Sole traders are generally closer to their customers and offer a more
personalised approach and improved customer service.

Disadvantages
❌ Since all decisions are taken by the owner, the area of the business will be
limited to the management abilities of the owner.
❌ It is not always possible to attract highly skilled workers because the capital is
limited to one person.
❌ The owner has unlimited liability for debts, which means the owner is
personally liable for the debts of the business.
❌ They cannot expand the business operations because of limited capital.
❌ The owner is responsible for providing all the capital needed, which may
make it difficult to raise big amounts of capital when needed.
❌ If the owner does not have enough knowledge/experience the business
may fail.
❌ A sole trader lacks continuity especially in the event of death or illness.
❌ The risk of unlimited liability forces many sole traders not to expand
operations beyond a certain point.
❌ Tax is calculated according to a progressive income system, which can be up
to a maximum of 40%.

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17
Q

6 Forms/Types of Ownership

A
  1. Sole proprietor
  2. Close Corporation
  3. Partnership
  4. Profit Company
  5. Non Profit Company
  6. Co-Operatives
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18
Q

A business that is started and owned by one person that does not register the business as a seperate legal entity

A

Sole trader

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19
Q

A business owned by
between 2 and 20 people.

A

Partnership

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20
Q

A business owned by
between 1 and 10 members.

A

Close Corporation

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21
Q

A business that does
not trade its shares publicly.

A

Private Company

22
Q

A business that trades its shares publicly.

A

Public Company

23
Q

The debts of the business are must be paid by the business.
The owners of the business are not responsible for paying the debts of the business.

A

Limited Liabiity

24
Q

The owners are responsible for paying any debts that the business is unable to pay.

A

Unlimited liability

25
Q

The business is seen as a legal person and can enter into contracts in the name of the business.

A

Legal personality

26
Q

What must be in the name of a closed corporation?

A

The letters “CC”

27
Q

What must be in the name of a public company?

A

The word Limited or the letters “LTD”

28
Q

What must be in the name of a private company?

A

The letters (PTY)Ltd

29
Q

Can you still open a closed corporation if you wanted to start a business today?

A

No

30
Q

Advantage of a sole trader

A

No legal requirements to start- quick and low cost

31
Q

Disdvantage of a sole trader

A

The owner is the legal entity and has to enter into a contract in his/her own name. This means the owner carries all the risks

32
Q

Sole trader continuity of existance

A

The business has no continuity or existence

33
Q

Sole Trader owners liability

A

unlimited liability

34
Q

Tax implications of a sole trader

A

depends on the profit generated by the business.

Refer to the tax scales for this discussion.
If profit is below R272 70

35
Q

Capital requirements for a sole trader

A

If the business does not require a large amount of capital and the owner is capable of raising all capital in his own capacity

36
Q

Discuss
Partnership

A

Define:
📌 A partnership is an arrangement where 2 or more parties, known as business partners, agree to form a business for their mutual interest.

Characteristics
🥸 There should be at least a minimum of two people in a partnership.
🥸 The partnership agreement becomes the basis of the association between
the partners.
🥸 Partners combine capital and may also borrow capital from financial institutions.
🥸 They share the profit according to the partnership agreement.
🥸 Partners share responsibilities and they are all involved in making business decisions.
🥸 Every partner in the business has unlimited liability and are jointly and severally liable for the debts of the business.
🥸 There are no legal requirements regarding the name of the business.
🥸 Partners share profits made and they are therefore motivated to work harder.
🥸 The partnership has no legal personality and therefore has no continuity.
🥸 The partnership does not pay income tax, only the partners in their
personal capacities.
🥸 Auditing of financial statements is optional.

Advantages
✅ Each partner will bring their knowledge, skills, experience, and contacts to the
business thus giving the business a better chance to succeed.
✅ All partners have a personal interest in the business.
✅ The workload and responsibility are shared between partners and each
partner can focus on their strengths.
✅ Partners invest new capital into the business to finance expansion.
✅ Partners share responsibilities for decision-making and managing the business.
✅ Partnerships are not compelled by law to prepare audited financial statements.
✅ Partners are taxed in their capacities, which could lead to lower taxation – this will be dependent on the level of income of each individual.
✅ Partners share profits made and they are therefore motivated to work harder.

Disadvantages
❌ Partners might still find it difficult to raise capital as not all partners contribute cash.
❌ Partners are jointly and severally liable for the actions of the other partners.
❌ The partnership has no independent legal existence distinct from the partners,
it will be dissolved upon registration or death of one of the partners.
❌ Partners do not have a separate legal personality – the partners are personally liable for debts and losses incurred.
❌ Different personalities and options of partners can lead to conflict
and disagreements.
❌ Each business partner is legally responsible for the joint liability of
the partnership.
❌ A partnership has unlimited liability, which means that partners risk losing
their personal possessions.
❌ Discussion between partners can slow down decision-making, and they may
disagree on important business decisions.
❌ In a large partnership, the partners may struggle to agree on business issues.
❌ Partnership lacks continuity, if one of the partners dies/retires, the partnership needs to dissolve and a new agreement has to be drawn up.

37
Q

The differences between a sole trade and
a partnership

A
38
Q

The differences between a
Private Company and Public company

A
39
Q

Difference between all the
Name of Bussiness

A
40
Q

Difference between all the
Formation Procedure

A
41
Q

Difference between all the
Number of Owners

A
42
Q

Difference between all the
Continuity of Existence

A
43
Q

Difference between all the
Personal Liability

A
44
Q

Difference between all the
Profit sharing

A
45
Q

Discuss
Private company

A

Define:
📌 A private company is a company whose shares may NOT be offered to the public for sale.

Characteristics
🥸 A private company can have an unlimited number of shareholders, however, a
minimum of one director and one shareholder is required.
🥸 The liability of shareholders is limited to the number of shares held by them.
🥸 Raises capital by issuing shares privately to its shareholders.
🥸 The name of a private company must end with the words ‘(Proprietary) Limited’ or ‘(Pty) Ltd’.
🥸 The company has a legal personality therefore it has unlimited continuity even
in the case of death, insolvency, the bankruptcy of any of its shareholders.
🥸 A private company is not allowed to sell shares to the public.
🥸 Profits are shared in the form of dividends in proportion to the number of shares held.
🥸 It needs to be registered with the registrar of companies by drawing up a Memorandum of Incorporation.
🥸 The Companies Act (No. 71 of 2008) imposes personal liability on directors who are knowingly part of the carrying on of the business recklessly or fraudulently.
🥸 A private company must prepare annual financial statements.
🥸 Annual financial statements need not be either audited or independently reviewed.

Advantages
✅ A company can continue to trade even if one shareholder dies/resigns.
✅ It is managed at least by one competent highly skilled director.
✅ Shareholders must agree to the sale of transfer of shares.
✅ Shareholder’s liability is restricted to the number of shares they own.
✅ Information in a private company is only available to shareholders.
✅ Not required to file annual financial statements with the commission.
✅ Shareholders can appoint the most capable directors to manage their company.
✅ The company has its own legal identity and shareholders have no direct legal implications/limited liability.
✅ A large amount of capital can be raised since there is no limit on the number of shareholders.
✅ It is possible to sell a private company as it is a legal entity in its own right.
✅ The management of the company can improve since directors are appointed by shareholders.
✅ The company can access long-term capital and therefore has good long-term growth opportunities.
✅ The company is a separate legal person so it may purchase assets in its name.

Disadvantages
❌ Private companies are subject to many legal requirements and regulations which can be onerous.
❌ Decision-making takes time because of the large number of people in management.
❌ The private company cannot be listed on the stock exchange, therefore, it cannot sell shares to the public.
❌ Directors may sometimes act in their own interest, not in the company’s best interest.
❌ Annual financial statements must be reviewed by a qualified person, which is an extra expense to the company.
❌ Difficult and expensive to establish as the company is subjected to many legal requirements.
❌ The Private company pays tax on the profits of the business and on declared dividends and are therefore subject to double taxation.
❌ Directors may sometimes be held liable for debts if it can be proven that they committed fraud.
❌ Some shareholders may not exercise their voting rights resulting in choosing the wrong person as a director.

46
Q

Discuss
Personal liability company

A

Define:
📌 A personal liability company is mainly used by associations such as lawyers and accountants.

Characteristics of a personal liability company
🥸 The name of the personal liability company ends with INC.
🥸 required to have a minimum of one director on the board of directors.
🥸 The Memorandum of Incorporation can be altered to require more than one director on the board.
🥸 Directors have unlimited liability and they are jointly liable for the debts of the business even if they are no longer active in the business.
🥸 The Memorandum of Incorporation should state that it is a personal liability company.

**NOTE: The advantages **of a personal liability company are the same as those for a private company.

The disadvantages of a personal liability company are also the same as those for a private company, except that the directors of the personal liability company have unlimited liability.

47
Q

Discuss
Public Company

A

Define:
📌 The public company is a company that is registered to offer shares and stock to the general public.

Characteristics of a personal liability company
🥸 A minimum of one person is required to start a public company.
🥸 The company name ends with the letters Ltd.
🥸 Shareholders have limited liability and are not personally liable for the debts of the business.
🥸 Individuals can own shares in this company and these shares are freely transferable.
🥸 A prospectus is issued to the public to invite the public to invest in the company to raise capital.
🥸 A public company has a separate legal personality
and therefore has unlimited continuity.
🥸 A public company has a separate legal personality.
🥸 Requires three or more directors and three or more shareholders.
🥸 Profits are shared in the form of dividends in proportion to the shares held.
🥸 A public company is required to hold an AGM where shareholders vote to elect a new board of directors.
🥸 Must register with the Registrar of Companies by drawing up a Memorandum of Incorporation.
🥸 Raises capital by issuing shares to the public and borrowing capital by
issuing debentures.
🥸 Auditing of financial statements is compulsory and audited statements are
made available to shareholders and the public.

Advantages
✅ Public companies enjoy the ability to raise funds through the sale of the
company’s stock to the public.
✅ The business has its own legal identity and can own assets/property.
✅ Managed by at least three competent, highly skilled directors.
✅ Directors bring creative ideas which encourage innovation/high productivity.
✅ Shareholders can sell/transfer their shares freely.
✅ The ability to raise large amounts of capital in public exchanges enables the
company to carry out capital-intensive activities.
✅ Strict regulatory requirements protect shareholders.
✅ Easy to raise funds for growth through the sale of shares.
✅ Additional shares can be raised by issuing more shares or debentures.
✅ No limitation on the number of shareholders, so growth/expansion is not limited.
✅ Shareholders have limited liability for the debt of the company and may lose
only the amount invested in the business.
✅ The management of the company can improve since directors are accountable to shareholders.
✅ The public has access to information and this could motivate them to buy shares from a company.

Disadvantages
❌ Public companies are vulnerable to increased scrutiny from the government
and the public.
❌ Difficult and expensive to establish as the company is subjected to many
legal requirements.
❌ They must prepare their financial reports in accordance with the Generally
❌ Directors may not be motivated to work very hard because shareholders decide on the directors’ remuneration.
❌ Directors may not have a direct interest in the company, which slows down the growth and profi t.
❌ Increased director’s fees, will increase expenses which will reduce net profi t.
❌ Some shareholders may not exercise their voting rights resulting in choosing
the wrong person as a director.
❌ A full fi nancial report must be submitted to the major shareholders each year.
❌ A large management structure can result in longer timeframes for
decision-making.
❌ Auditing of fi nancial statements are compulsory.

48
Q

GAAP

A

Generally Accepted Accounting Principles

49
Q

Discuss
State-owned company (SOC)

A

Defining a state-owned company (SOC)
In a state-owned company, the government is a major shareholder, and it falls under the Department of Public Enterprise.

These companies perform specific functions and operate in accordance with a particular Act. They take on the role
of commercial enterprise on behalf of the government.

Examples of state-owned companies in South Africa include Armscor, Alexkor, SAA, Eskom, Transnet.

Characteristics of an SOC
🥸 The state-owned company is financed by the government.
🥸 The name ends with the letters SOC.
🥸 The SOC is listed as a public company.
🥸 These enterprises are managed by the government not by individuals.
🥸 Requires three or more directors and one or more shareholders.
🥸 SOCs are registered with the Registrar of Companies by drawing up a
Memorandum of Incorporation.
🥸 The Act imposes personal liability on directors who knowingly participate in
reckless or fraudulent business.
🥸 The state-owned company must have its financial statements audited.
🥸 A state-owned company is compelled to hold an AGM.
🥸 A state-owned company has a separate legal personality and its shareholders have limited liability.

Advantages of an SOC
✅ SOCs help eliminate economic exploitation and oppression.
✅ They offer essential services which may not be offered by the private sector.
✅ Shareholders have limited liability.
✅ Profits may be used to finance other state departments.
✅ Wasteful duplication of services is eliminated.
✅ Jobs are created for all skill levels.
✅ Generates income to finance social programmes.
✅ Prices are kept reasonable to make services affordable to more citizens.
✅ Provides healthy competition to private sector companies because of
government contributions.
✅ Most of SOCs run on sound business lines as they have their surpluses to run
their projects.
✅ An SOC company has a separate legal personality.

Disadvantages of an SOC
❌ SOCs usually suffer from inefficiencies in management.
❌ Management of SOCs does not implement new ideas and innovations.
❌ Losses must be covered by the taxpayers.
❌ Government can lose money if the business fails.
❌ Shares are not freely tradable making it difficult to raise capital.
❌ A lack of incentive for employees to perform if there is no share in the profit.
❌ Often rely on government subsidies, which may not cover all the company’s expenses.
❌ SOCs must follow strict regulations for operations to raise capital.
❌ The management of the SOCs must attend an AGM.
❌ An SOC is compelled to have its financial statements audited.

50
Q

Discuss
Non-profit company (NPC)

A

Defining a non-profi t company (NPC)
A non-profi t company is a legal entity organised and operated for a collective, public or social benefit.

They include churches, charity organisations, and cultural
organisations.

The primary objective of an NPC is to benefi t the public, not to make a profit

Characteristics of NPCs
🥸 The main aim is to provide a service and not to make a profit.
🥸 They are funded by donations and foreign funding.
🥸 The name of the company must end in NPC.
🥸 All profi ts must be used for the primary objective of the NPC.
🥸 It must prepare a Memorandum of Incorporation.
🥸 Qualifying NPCs are granted tax-exempt status.
🥸 The board of an NPC must comprise of at least three directors (three or more directors).
🥸 NPCs do not have share capital and cannot distribute shares or pay a dividend
to their members.

Advantages of an NPC
✅ Profits are used solely for the primary objective of the organisation.
✅ The company does not pay tax, so all earnings can be cycled back into the organisation to improve it.
✅ Donations made by donors are tax-deductible, therefore it motivates people to donate to the organisation.
✅ Employees of non-profi ts are not personally liable for the debts of the non-profit./The liability of the members is limited.
✅ An NPCs existence can last long after the founders leave the business.
✅ Can receive grants/aid from the government.
✅ A surplus of income is retained to further the goals of the business.
✅ Must prepare the fi nancial statements at the end of the year and is not
compelled to audit the fi nancial statements.
✅ NPCs are not compelled to hold an AGM.

Disadvantages of an NPC
❌ Need professional assistance to set up this organisation.
❌ Does not generate enough capital to cover their expenses.
❌ Donations may not always be enough to finance the company’s expenses.
❌ Assets are not distributed to the members upon closing down.
❌ Creating an NPC takes time/effort/money.
❌ Obtaining grants can be a slow and tiring process.
❌ Incorporators cannot take along the assets accumulated by the NPC if they decide to leave.
❌ They are not allowed to pay bonuses to members.
❌ They are compelled to prepare annual financial statements.

51
Q

Different types of co-operatives

A

A co-operative society is a voluntary association that is established with the aim
of service to its members. It is a form of business whereby people with similar
interests link for promotion of common goals.

52
Q

Discuss Co-operatives

A