Chapter 3: Forms of Ownership

28 question-and-answer flashcards covering key concepts from Chapter 3: Forms of Ownership, including legal persona, liability, tax, continuity, sole trader and partnership characteristics, advantages, and disadvantages.

Why is selecting the correct form of ownership important for an entrepreneur?

Because the wrong choice can increase legal and financial risk; the correct form minimises those risks within the legal framework.

Name six key factors to consider when choosing a form of ownership.

Contractual capacity, legal persona, liability for debt, capital requirements, management & control, continuity of existence, and tax implications.

What is a legal persona (legal personality)?

The legal right of a business or person to enter contracts, own property, and sue or be sued in its own name.

What must happen for a business to gain a separate legal personality?

The business must be registered, thereby separating the legal rights and obligations of the owner and the business.

Define liability in the context of business ownership.

Responsibility for the debts of the business—whether the owner or the business is held accountable.

Who has limited or unlimited liability—the business or the owner?

Always the owner; the business itself never has limited or unlimited liability.

What is unlimited liability?

The owner is personally responsible for all business debts and may lose personal assets if the business fails.

What is limited liability?

The owner’s personal assets are protected; losses are limited to the amount invested in the business.

How are individuals taxed on profit in South Africa?

According to a progressive personal income-tax system that rises with income, up to 45% (2020).

How are registered companies taxed in South Africa?

At a proportional 27% corporate tax on profits, plus 20% dividends tax (2020).

When does a business enjoy continuity of existence?

When it is a separate registered legal entity, so death or retirement of owners does not end the business.

In a sole trader or partnership, who typically manages and controls the business?

The owner(s) themselves, although they can appoint a manager if they choose.

What is meant by capital in a business context?

The money required to establish and operate the business; larger businesses need more capital.

Describe the formation procedure for a sole trader.

Very quick and inexpensive; the business is not registered, so no formal legal paperwork is required.

List four key characteristics of a sole trader/sole proprietorship.

Owned by one person, not a separate legal entity, owner has unlimited liability, no continuity, owner taxed personally.

State three advantages of operating as a sole trader.

• Quick and inexpensive to start
• Owner keeps all profits and makes fast decisions
• Low tax rate if profits are relatively small

State three disadvantages of operating as a sole trader.

• Unlimited personal liability
• Limited capital and growth potential
• No continuity—business ends if owner dies or retires

What is a partnership?

A verbal, written, or tacit agreement between 2–20 people to combine money and skills to run a business.

Give five typical items included in a partnership agreement.

Name & address, aims, partner names and contributions, profit-sharing ratio, duties/responsibilities, decision procedures, arbitration clause, dissolution process.

How many people may own a partnership according to the notes?

At least two but not more than 20 partners.

Explain the liability of partners for business debts.

Partners have unlimited, joint, and several liability—each may be held responsible for the entire debt if the business cannot pay.

What does "jointly and severally liable" mean?

A creditor can sue any one partner for the full debt; that partner can then claim proportional amounts from the others.

How are partners taxed on partnership profits?

Each partner pays personal income tax on his/her share of the profit under the progressive tax system.

What happens to a partnership if a partner dies or retires?

The partnership ceases to exist; the agreement is terminated and must be re-established with a new agreement.

List three advantages of a partnership compared with a sole trader.

• More capital and resources (2–20 owners)
• Combined skills and shared responsibility
• Better decision-making through diverse input

List three disadvantages of a partnership.

• Unlimited liability for all partners
• Slower decision-making because all partners must agree
• No continuity; dissolution upon death or withdrawal of a partner

What is a "sleeping partner"?

A partner who invests capital but does not participate in day-to-day management of the business.