BSTE 212 - Sole Proprietorship Notes

Form of Ownership

  • Definition:

    • The way a business is owned and managed.

    • How capital is collected.

    • Who takes responsibility for losses and risks.

    • How profit is shared.

Different Types of Forms of Ownership

  • Sole Proprietor (Trader)

  • Partnership

  • Close Corporation and Cooperative Society

  • Business Trust

  • Profit Companies

  • Non-profit Company

Ownership Form Criteria

  • Legal Personality / Regspersoonlikheid

  • Continuity of the form of ownership / Kontinuïteit van die vorm van eienaarskap

  • Liability of the members for debt / Aanspreeklikheid vir skuld deur die lede

  • Financing possibilities (capital acquisition) / Finansieringsopsies (kapitaal verkryging)

  • Prescriptions about profit sharing / Voorskrifte oor winsverdeling

  • Income tax payable under each form of ownership / Inkomstebelasting onder elke vorm van eienaarskap

  • Participation in management / Deelname in bestuur

  • Legal requirements towards setting up, management, and dissolution / Regsvereistes t.o.v. stigting, bestuur en ontbinding

Sole Proprietor

  • Definition:

    • An enterprise owned by one person.

    • The owner usually manages the enterprise.

    • Direct control and authorization over the activities of the business.

    • No separation between the business and the owner.

    • Finances flow through the business to the owner.

    • Easy and inexpensive to create.

    • Few government regulations, making it a more flexible type of ownership.

    • Complete control at the discretion of the owner.

  • Characteristics:

    • Uncomplicated form of ownership

    • Only 1 owner

    • Simple and small business

    • Without large capital investment.

  • Legal Personality:

    • No legal personality.

    • No distinction between the owner and sole proprietorship.

    • The assets and liabilities of the sole proprietor belong to the owner.

  • Continuity:

    • Limited continuity – business does not have legal personality.

    • The business’s legal status is affected if something happens to the owner.

    • Since the owner’s and SP’s assets are regarded as one by the law, the death or insolvency of the owner terminates the sole proprietorship.

    • When the enterprise is sold, the legal status under the previous owner is ended, and the legal status under the new name (owner) is continued.

  • Financing Possibilities:

    • Only one owner – limited possibilities for acquiring capital.

    • Usually, the owner supplies the financial needs of the enterprise from personal sources.

    • Funds are limited to the owner's financial capital and credit score.

    • Growth of the small business enterprise and its financing independence are partly due to profits that are reinvested in the enterprise.

  • Profit Sharing:

    • The owner is entitled to all the profit after income tax is paid.

    • Because the profit belongs to the owner, it forms a strong incentive to maximize the profit.

    • This incentive often leads to improved processes and better management.

  • Income Tax:

    • The owner and the SP are not taxed separately.

    • Tax is calculated according to the taxable income of the individual on a personal scale (together with the income he has received).

    • The amount of profit is an important factor in the amount of income tax that has to be paid.

  • Participation in Management:

    • The only owner – direct control and authority over everything in business.

    • If a manager is not appointed, the owner manages the enterprise himself.

    • A sole proprietor can swiftly adapt to changing circumstances.

    • No necessary for the manager to motivate decisions to others before implementation.

  • Legal Requirements:

    • The legal requirements to establish a SP are simple.

    • Registration at the local authorities in which operations are planned is sometimes required.

    • The transfer of ownership is also simple because the SP does not have a legal personality. If the owner wishes to sell the business or give it to example their son/daughter, there won't be extensive legal formalities to deal with.

    • Register name with Companies Intellectual Property Commission.

    • Prescribe to Business Names Act (27 of 1960)

Advantages of a Sole Proprietorship

  • Easy to create

  • The least expensive way of beginning a business

  • The owner has total decision-making authority

  • There are no legal restrictions

  • It is easy to discontinue

  • The owner has the right to profit

  • Close relationship between owner and clients

  • Can easily adapt to changes

  • Self-interest encourages the owner to be conscientious, hardworking, and precise

Disadvantages of a Sole Proprietorship

  • The owner is liable for all obligations and debts of the business.

  • The business may not be successful if the owner has limited money, lacks ability, and necessary experience to run the business.

  • Because of the relatively unstable nature of the business, it is difficult to raise capital for expanding the business.

  • If the business fails, creditors can take the personal property as well as the business property of the (single) owner to settle their claims. This means single ownership involves unlimited liability for debts and losses.

  • There is limited opportunity for employees regarding monetary rewards (e.g., profit sharing, bonuses, etc.) and promotions.

  • Generally, a single ownership firm has a limited life, i.e., the firm may cease to exist with the death of the proprietor. This is the cause of the unstable nature of the firm.