Topic 10 Forms of Ownership

Question 1

Define a Profit Company

Answer 1

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

Question 2

Define a Non-Profit Company

Answer 2

a company incorporated for public benefit.

Question 3

Partnership:

Answer 3

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

Question 4

Co-operative society:

Answer 4

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

Question 5

Company:

Answer 5

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

Question 6

Public company:

Answer 6

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

Question 7

Private company:

Answer 7

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

Question 8

State-owned company:

Answer 8

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

Question 9

Prospectus:

Answer 9

a document inviting the public to buy securities/shares.

Question 10

Annual General Meeting (AGM):

Answer 10

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

Question 11

Directors:

Answer 11

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

Question 12

Audit:

Answer 12

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

Question 14

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

Answer 14

Question 15

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

Answer 15

Question 16

Discuss
Sole Trader

Answer 16

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%.

Question 17

6 Forms/Types of Ownership

Answer 17

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

Question 18

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

Answer 18

Sole trader

Question 19

A business owned by
between 2 and 20 people.

Answer 19

Partnership

Question 20

A business owned by
between 1 and 10 members.

Answer 20

Close Corporation

Question 21

A business that does
not trade its shares publicly.

Answer 21

Private Company

Question 22

A business that trades its shares publicly.

Answer 22

Public Company

Question 23

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.

Answer 23

Limited Liabiity

Question 24

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

Answer 24

Unlimited liability

Question 25

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

Answer 25

Legal personality

Question 26

What must be in the name of a closed corporation?

Answer 26

The letters “CC”

Question 27

What must be in the name of a public company?

Answer 27

The word Limited or the letters “LTD”

Question 28

What must be in the name of a private company?

Answer 28

The letters (PTY)Ltd

Question 29

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

Answer 29

No

Question 30

Advantage of a sole trader

Answer 30

No legal requirements to start- quick and low cost

Question 31

Disdvantage of a sole trader

Answer 31

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

Question 32

Sole trader continuity of existance

Answer 32

The business has no continuity or existence

Question 33

Sole Trader owners liability

Answer 33

unlimited liability

Question 34

Tax implications of a sole trader

Answer 34

depends on the profit generated by the business.

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

Question 35

Capital requirements for a sole trader

Answer 35

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

Question 36

Discuss
Partnership

Answer 36

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.

Question 37

The differences between a sole trade and
a partnership

Answer 37

Question 38

The differences between a
Private Company and Public company

Answer 38

Question 39

Difference between all the
Name of Bussiness

Answer 39

Question 40

Difference between all the
Formation Procedure

Answer 40

Question 41

Difference between all the
Number of Owners

Answer 41

Question 42

Difference between all the
Continuity of Existence

Answer 42

Question 43

Difference between all the
Personal Liability

Answer 43

Question 44

Difference between all the
Profit sharing

Answer 44

Question 45

Discuss
Private company

Answer 45

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.

Question 46

Discuss
Personal liability company

Answer 46

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.

Question 47

Discuss
Public Company

Answer 47

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.

Question 48

GAAP

Answer 48

Generally Accepted Accounting Principles

Question 49

Discuss
State-owned company (SOC)

Answer 49

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.

Question 50

Discuss
Non-profit company (NPC)

Answer 50

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.

Question 51

Different types of co-operatives

Answer 51

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.

Question 52

Discuss Co-operatives