Chapter 3: Forms of Ownership

Introduction

• Entrepreneur must choose suitable Form of Ownership (FOO) to minimise risk within legal framework.
• Core decision areas: legal persona, liability, tax, continuity, management & control, capital size, formation procedures.

Legal Persona

• Separate legal personality exists only if business is registered.
• Grants right to contract, own property, sue/be sued separately from owners.

Liability (Debt Responsibility)

• Always refers to owner, not business.
• Unlimited liability: owner’s personal assets at risk.
• Limited liability: personal assets protected.

Tax Implications

• Individuals: progressive up to 45\%.
• Registered companies: flat 28\% on profit + 20\% dividends tax.
• Unregistered entities (sole trader, partnership): profits taxed in owners’ personal capacity.

Continuity

• Exists only when business is a separate legal entity.
• No continuity: death/retirement dissolves or ends business.

Management & Control

• Sole owner/partners decide whether to self-manage or appoint managers.
• Companies normally separate ownership (shareholders) and control (Board).

Capital (Size of Business)

• Larger ventures need more contributors/owners to supply or raise capital.

Formation Procedures

• Registered entities: formal, cost & time intensive.
• Unregistered entities (sole trader, partnership): quick, minimal cost.

Sole Trader / Sole Proprietorship

Characteristics

• Ownership: 1 person; cannot register → no separate legal persona.
• Capital provided/borrowed by owner personally.
• Unlimited liability; no continuity.
• Profit taxed in owner’s personal bracket.

Advantages

• Rapid & cost-free formation.
• Owner keeps all profit; quick decisions.
• Full experience across functions; close customer ties.
• Low profits may be taxed below 28\%.

Disadvantages

• Unlimited liability; personal assets at risk.
• Capital & growth limited to single owner’s means.
• Sole responsibility; no holiday/illness cover.
• High profits taxed above 28\%.
• No continuity.

Partnership

Characteristics

• Agreement (verbal/written/tacit) between 2 – 20 people.
• Not a separate legal entity; partners are legal persons.
• Profits/losses shared per agreed ratio.
• Unlimited, joint & several liability.
• Taxed individually on share of profit.
• No continuity; death/exit dissolves & new agreement required.
• Possible sleeping partners; new partners may bring in capital.

Advantages

• Simple, low-cost setup; partnership agreement optional but recommended.
• Combined capital > sole trader → potential growth.
• Pooled skills → synergy & better decisions.
• Shared responsibility & division of labour.
• Low profits may be taxed below 28\%.
• Can retain key employees by offering partnership.

Disadvantages

• Still unregistered → no limited liability.
• Capital ceiling at 20 partners.
• Consultative decisions slow.
• High profits taxed above 28\%.
• Unlimited, joint & several liability.
• No continuity.