Definition: Refers to the legal status of a business and how it is owned.
Entrepreneurs need to choose the form of ownership that best suits their business.
Eight types of ownership:
Sole Proprietor
Partnership
Close Corporations
Private Companies
Public Companies
Personal Liability Companies
State-Owned Companies
Profit Companies
Non-Profit Companies
Sole Proprietor
Definition: The simplest form where an individual is responsible for setting up and running the business, managing investments, risks, and returns.
Characteristics:
Owned and managed by one person.
Assets and profits belong to the owner.
No legal separation between the business and the owner.
Owner is legally responsible for debts.
The business doesn't pay separate tax; the owner pays tax in their capacity.
Profit is added to the owner's other income, and SARS calculates the tax.
No legal and administrative formalities for formation.
The sole proprietor is not a legal entity; agreements are made in the owner's name.
Unlimited liability; personal possessions can be used to pay debts.
Advantages:
Easy to start.
Business is run as the owner sees fit.
Assets and profits belong to the owner.
Owner makes all decisions.
Requires little capital to start.
Simple management structure.
Easily adapts to customer needs.
No legal process and requirements.
Personal encouragement and contact with customers.
Disadvantages:
Owner provides only skills, time, and energy.
Business cannot continue if the owner dies or retires.
Limited capital.
Unlimited liability.
Cash flow problems are common.
Restricted growth due to lack of capital.
Not a legal entity and no continuity.
Difficult to attract highly skilled employees.
Potential failure without enough knowledge or experience.
Partnership
Definition: Owned and managed by two or more individuals (partners) who agree to set up and run a business and share profits according to an agreement.
Characteristics:
Agreement between two or more persons.
Each partner contributes (skills, resources, or money).
Profit and losses shared per the partnership agreement.
Not legal entities, so partnerships do not pay tax in their personal capacities.
Profit is divided among partners in a ratio agreed upon.
No legal requirements regarding the name.
Partners have unlimited liability; jointly and severally liable for debts.
Auditing of financial statements is optional.
Shared responsibilities and decision-making.
No legal formalities to start, only an agreement is required.
No legal personality, so no continuity when a partner leaves.
Legal liabilities lie with the partners.
Advantages:
Shared responsibilities.
Partners can deal with problems together.
Easy to establish.
Combined knowledge and skills for better decisions.
Shared workload and responsibility.
Shared resources.
Partners pay tax in their personal capacity.
Personal interest in the business.
Ability to bring in extra partners.
Attracting prospective employees with partnership incentives.
Partners contribute new skills and ideas.
Motivated to work hard due to profit sharing.
Easy to raise capital.
Potentially lower taxation.
Disadvantages:
Potential disagreements and slow decision-making.
A bad decision by one partner can lead to losses.
Dissolution required if a partner dies or retires.
Unlimited liability for all partners.
Joint liability for the partnership.
Conflicts due to different personalities and opinions.
Profits must be shared.
Limited lifespan.
Resignation, death, or bankruptcy of a partner can affect profit and stability.
Potential lack of capital and cash flow.
Unequal contributions from partners.
Close Corporation (CC)
Definition: An optional association of one to ten persons who qualify, secured incorporation under Act 69 of 1984.
The new Companies Act does not make it possible to register a Close Corporation (CC), however existent CCs may continue to trade.
Characteristics:
Appropriate for small and medium businesses.
Legal entities with legal rights and responsibilities.
One to ten members who share a common goal.
All members involved in management.
Each member contributes assets/services.
Name ends with CC.
Members have unlimited liability except where the CC has had more than ten members for six months or longer.
Own legal personality with unlimited continuity.
Optional auditing; only requires an accounting officer.
Transfer of member's interest requires approval.
Profits are shared in proportion to member's interest.
Advantages:
Few legal requirements.
Legal entity with continuity.
Can be converted to a private company.
Members have limited liability.
Owners' interest doesn't need to be proportional to capital contribution.
May be exempt from auditing by CIPC.
Disadvantages:
Limited growth with a maximum of ten members.
Members can be personally liable for losses if actions are incompetent.
Audited financial statements may be required for loans.
Taxed like a company, potentially higher than personal rates.
Difficult for members to leave.
Double taxation (income and STC on dividends).
Private Company
Definition: Restricts share transfers and does not invite public subscription; name includes "Proprietary Limited" or (Pty) Ltd.
Characteristics:
One or more directors and shareholders are required.
No limit on the number of shareholders.
Not bound to publish a prospectus.
Subject to many legal requirements.
Not allowed to sell shares to the public.
A minimum of two shareholders are required for a meeting, except in the case of a one-person company.
Register with the Registrar of Companies by drawing up a Memorandum of Incorporation.
Annual financial statements must be audited with some exceptions in terms of the new Companies Act.
Private companies do not offer securities to the public.
Shareholders have limited liability for the debt of the business.
Investors put capital in to earn profit from shares.
The company has a legal personality as well as unlimited continuity.
Raises capital by issuing shares to its shareholders.
Profits are shared in the form of dividends in proportion to the number of shares held.
Advantages:
More capital can be raised than by an individual.
Auditing of financial statements is voluntary.
Not necessary to appoint an auditor, audit committee, or company secretary.
More opportunities to pay less taxation.
Good long-term growth opportunities.
Own legal identity and shareholders have no direct legal implications/ limited liability.
Board of directors with expertise/experience can be appointed to make decisions.
Not required to file annual financial statements with the commission.
It is a legal person and can sign contracts in its own name.
The new Act forces personal liability on directors who knowingly participated in conducting business in a reckless/fraudulent manner.
Financial statements are private and not available to the general public.
A company has continuity of existence.
It is possible to sell a private company as it is a legal entity in its own right.
It can easily raise capital by issuing shares to its members.
Disadvantages:
Restricted from raising funds directly from the public.
Costs and formalities associated with forming a company.
Tax is paid on the taxable income of the company and companies pay secondary tax on dividends distributed to shareholders.
Requires a lot of capital to start a private company.
The more shareholders, the less profits are shared.
More taxation requirements.
Directors do not have a personal interest in the business.
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.
Pays tax on the profits of the business and on declared dividends - Subject to double taxation.
Must prepare annual financial statements.
Personal Liability Company
Definition: A private company used by associations like lawyers, engineers, and accountants; name ends with