ARGUMENTS FOR AND AGAINST USING DIFFERENT FORMS OF OWNERSHIP

The following factors would influence the decision of the entrepreneur•Who owns the business?•Who will manage the business?•What tax rate is payable and who will be responsible for paying tax?•How will the entrepreneur raise capital?•Will the business continue to exist if ownership changes?•How will the profits of the business be divided?•Does the business have its own legal entity?•How will legislation impact on the business?

Sole proprietorshipArguments in favour of choosing a sole trader:• Owner is committed to the business and works very hard.• Little legal requirements so business can be started and ended

easily.• Owner gains experience in all aspects of business management.• This business can easily adapt to challenges.• Close ties can develop between the customers and the owner.Arguments against a sole trader:• Unlimited liability for debt.• Difficult to get finance because only one owner to stand security.• Owner bears all the responsibilities.• Difficult to get good employees as the sole trader can not offer

promotions and large salaries.

PartnershipArguments in favour of choosing a partnership:• Owner is committed to the business and works very hard.• Easier to obtain finance because owners are jointly and severally liable for the dept.• Combining skills and abilities enable partners to specialize in what they do best.• Because partners are liable in their personal capacity for the debts of the business, they work hard.

Arguments against a partnership:• Each partner is an agent of the partnership and their actions binds the other partners.• A partnership does not have continuity.• Decision making is slow because all partners need to be consulted.• Disagreements between partners can hamper productivity.

Close CorporationArguments in favour of choosing a close corporation:• Members of a CC have limited liability to the debt of the

business.• Owners are usually mangers of the business.• It is easy and inexpensive to start a CC.• Not necessary to audit financial statements and hold annual

meetings saving time.• Up to 10 members can contribute capital and expertise to the

business.Arguments against a close corporation:• Capital is restricted to the contribution of 10 members.• Financial statements do not need to be audited and fraud can

occur.• Ownership can only be transferred if all members agree.• A CC may not be sold to a company.

Private CompanyArguments in favour of choosing a private company:• Suitable for undertaking in which secrecy is requirement.• No minimum subscription of shares has to be sold.• Shareholders have limited liability.• Membership can be increase to 50 to raise capital.• Annual general meetings are not required.Arguments against a private company:• Double taxation: Companies pay tax on taxable income of the company and secondary tax on the dividends distributed to the shareholders.• Shares are not freely transferable and cannot be sold on the JSE.• Capital contribution is limited to 50 shareholders.• General public cannot be invited to buy shares

Public CompanyArguments in favour of choosing a private company:• Competent directors appointed to manage the public company.• The companies Act protect the shareholders.• Investors can buy shares in various companies dividing their risks.• Limited liability for the shareholders.• A public company has continuity.Arguments against a private company:• Double taxation: Companies pay tax on taxable income of the

company and secondary tax on the dividends distributed to the shareholders.• The Memorandum of Incorporation can not be changed easily.• Expensive and time consuming to establish.• Admin costs very high due to registration of shareholders and paying

of dividends.• Many employees dependant on public companies.• Financial statements must be published giving competitors access to

information.

Capacity - refers to the power provided under law to a natural person or a juridical person to enter into binding contracts, and to sue and be sued in its own name.Different forms of ownership have different legal capacities.A sole trader and partnership is not seen as separate from the owner and does not have legal capacity.CC’s and companies on the other hand are seen as legal entities and separate from the owners.

THE IMAPACT OF CAPACITY ON DIFFERENT FORMS OF OWNERSHIP

•Sole proprietorship:• The entrepreneur starts this business in his own personal

capacity.• It is easy to establish and does not require a lot of

administration.• The entrepreneur will have unlimited liabilities for this kind of

business.• This means that his personal belongings can be attached for

debts of the business.•Partnership:• The partners start the business in their own personal capacity.• It is easy to establish and does not require a lot of

administration.• A partnership agreement is the only documentation required.• The partners are jointly and severely liable for the debts of the

business.• Partners have unlimited liabilities and the assets of the

business and the owners are not seen as separate.• Partners will have to enter contracts in their personal capacity

as a partnership is not a legal entity and can not enter into contracts

• Closed Corporations:• A CC is recognised as a legal entity and therefore the members of the

CC have limited liability.• The CC can enter into contracts and the entrepreneurs / member do

not have to enter into these contracts in their own personal a capacity.• It is not difficult to start a CC, and although new CC’s can not be

registered according to the Amended companies act, Entrepreneurs can purchase a shelf CC (existing but not active).• A maximum of 10 members contribute capital and expertise to this

business.

• Private Company:• The law sees private companies as separate entities.• Shareholders have limited liabilities to the debts of the business.• The assets of the shareholders and that of the business are separate.• The shareholders / owners of the company, appoints well qualified and

skilled directors to manage the company.• The company is liable to pay tax and can enter into contracts.• It is expensive and difficult to start a private company.

•Public Company:• The law sees public companies as separate entities.• Shareholders have limited liabilities to the debts of the

business.• The assets of the shareholders and that of the business are

separate.• The shareholders / owners of the company, appoints well

qualified and skilled directors to manage the company.• The company is liable to pay tax and can enter into contracts.• It is very expensive and time consuming to establish a public

company.• STC tax is payable on dividends received by shareholders and

companies tax is payable on profits earned.

THE IMAPACT OF TAXATION ON DIFFERENT FORMS OF OWNERSHIP

• Tax is a fee charged ("levied") by a government on a product, income, or activity.• If tax is levied directly on personal or corporate income, then it is a direct tax.• If tax is levied on the price of a good or service, then it is called an indirect tax.• The purpose of taxation is to finance government expenditure.• One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning.• Tax is charged on all income received whether it be individual income or business profits.• All businesses and individuals have to register for tax.• Partnerships and sole traders are not legal entities and do not have to register for tax.• Tax is levied on the income of the owners.• CC’s, private- and public companies pay company tax as well as STC tax on profit share

• Sole proprietorship:• The entrepreneur starts this business in his own personal capacity.• The business is not seen as separate from the owner and the owner is

liable for all the taxes.• Profits of the business are added to the personal income of the owner

and income tax is then payable.• Partnership:• The partners start the business in their own personal capacity.• The partners are jointly and severely liable for the debts of the

business.• The partnership is not seen as separate from the owners and the

partners will be liable for the tax.• Profits are shared according to the partnership agreements.• These profits are added to any other income the partners might

receive and income tax is then payable.• The partnership self does not register for tax and do not need to pay

tax on profits.

• Closed Corporations:• A CC is recognised as a legal entity and therefore the members of the

CC have limited liability.• The CC has to pay tax on the profits received and STC tax is payable on

profit distribution to the owners of the business.• Profits are distributed to the owners according to the CK1 (founding

statement) and the profit is then added to any other income they might receive. Income tax is payable on all income received.• The CC pays tax at 28% tax - the same as companies.• Private Company:• The law sees private companies as separate entities.• Shareholders have limited liabilities to the debts of the business.• The assets of the shareholders and that of the business are separate.• The private company has to pay tax on the profits received and STC tax

is payable on profit distribution in the form of dividends to the shareholders of the company.• Profits are distributed to the shareholders according to the amount and

types of shares they own. • The Companies pay tax at a rate of 28%.

• Public Company:• The law sees public companies as separate entities.• Shareholders have limited liabilities to the debts of the business.• The assets of the shareholders and that of the business are separate.• The private company has to pay tax on the profits received and STC tax is

payable on profit distribution in the form of dividends to the shareholders of the company.• Profits are distributed to the shareholders according to the amount and

types of shares they own. • The Companies pay tax at a rate of 28%.• Special Tax Dispensation for “Small Business Corporations”:• The proposal is that small firms classed as small business corporations with a

taxable income of less than R67 111 not be subject to any tax - up from the present threshold of R63 556 - while those with a taxable income of between R67 112 and R365 000 be taxed at 7 percent.

• Currently, small business corporations with taxable incomes of above R350 000 are subject to the corporate tax rate of 28 percent.

• But the proposal is to shift this so that entities with a taxable income of between R360 001 and R550 000 are subject to 21 percent, while those with a taxable income of above R550 001 are subject to 28 percent.

• National Treasury has also proposed that public-benefit organisations be subject to the same new rate structure as small business corporations.

• The Budget Review says the feasibility of special support for social-impact businesses (or social enterprises) which have both profit-making and social objectives, is being explored.

Management is the process whereby the objectives of the business are achieved through planning, organizing, leading and controlling people and other resources.Management is necessary to ensure that business runs smoothly and that the work of the various departments is integrated.The tasks of management include planning, organizing, leading and controlling (POLC).

THE IMAPACT OF MANAGEMENT ON DIFFERENT FORMS OF OWNERSHIP

•Decision making is the responsibility of management.•Operational decisions: decisions regarding the daily arrangements to ensure that the tactical decisions are carried out.• Tactical decisions: decision involving how things should be done in the business.• Strategic decisions: decisions which refer to the overall planning of what must be done in the business to ensure the long-term objectives of the business are met.

• It is important for the business success to have effective management at all levels (top, middle and front-line).•A manger must be able to motivate employees at all levels of the business hierarchy (different levels in business).

• Sole proprietorship:• The owner is directly involved with the management of the business.• The skills of the entrepreneur will determine the success of the business.• The owner has full control over all the functions within the business and gets

experience in all fields.• The owner must rely on his/her own instinct and experience when it comes to

decision making.• Because the owner is directly involved in all spheres of the business, it is easy

to adapt to challenges.• Close relationship between the owner and the customer also gives this

business an advantage.• Partnership:• The partners are usually directly involved with the management of the

business although a manager could be appointed.• Each of the partners contributes skills and experience to the business and

this could benefit decision making.• Decision making could become a lengthy process as all partners need to be

involved. This could also lead to conflict.• The partners have full controls over all the functions within the business and,

depending on the size of the partnership, the partnership would be able to adapt to changes and challenges easily.• Close ties with consumer also provides the partners with market information

that could lead to the business success

• Close Corporations:• There is no separation between the members and owners of the CC.• The members / owners are usually also the managers within the business.• Each of the members contributes skills and experience to the business and this

could benefit decision making.• Decision making could become a lengthy process as all members need to be

involved and in agreement.• This could also lead to conflict.• A CC has a maximum of 10 members in the business and this implies that the

business is small enough to quickly adapt to challenges in the business environment.

• Private Company:• The law sees private companies as separate entities.• The owners of the Private Company are called shareholders and they have

limited liabilities to the debts of the business.• Shareholders must appoint at least one Director.• A director with substantial experience and skills are usually appointed.• In a private company, no annual general meetings are required and the

directors of the company can make decision on behalf of the shareholder – depending on the stipulations of the Memorandum of Incorporation (new documentation according to amended companies act) is.• Usually private companies are of substantial size and therefore decisions could

be time consuming.

•Public Company:• Owners and managers are completely separated.• The owners of the public company are known as shareholders.• Ownership in a public company is freely transferable.• At an annual general meeting the owners would cast their

votes for important decisions; however the day to day management of the company is in the hands of the appointed directors.• New companies act stipulations that is different:• At least three directors must be appointed for the public

company.• The public company is required to provide a mechanism for

electronic participation of shareholders meetings.• Reporting process for whistle-blowers is required in a public

company.• Owners in a public company can be 1 or more (use to be 7 or

more).

Entrepreneurs are faced with the problem of financing when starting a business or when wanting to expand their existing business.The nature and the size of the business will determine how much capital is needed.A business needs two types of capital in order to function:

Fixed capital: The capital which finances the long-term capital needs such as land, buildings, machinery, equipment and vehicles.Working capital: Capital which finances the short-term capital needs of the business, such as rent, wages and electricity. These funds are used for current assets and are liquid

THE IMAPACT OF CAPITAL ON DIFFERENT FORMS OF OWNERSHIP

•Sole proprietorship:• Because the business is owned by only one person, the owner is

responsible for all the capital requirements of the business.• Capital in a sole trader could be limited.• This could hamper expansion of the business.• The owner could borrow capital but because only one person will

be security for the loan, the loan amount will be limited.• Because small business has a huge impact on alleviating

unemployment in the country, government has various incentives and assistance programmes for small business.• The owner could approach the department of trade and industry

for assistance.•Partnership:• There is no limit to the amount of partners in a partnership

according to the new companies act.• Capital of a partnership could be large and this could support

expansion of the business.• Each of the partners contributes skills, experience and capital to

the business.

• Close Corporations:• Each member contributes to the capital of the CC.• More capital can be raised by inviting more members to join the CC up to the

maximum of 10 members.• Contributions may be increased or decreased at any time, as long as all

members agree.• Capital is limited to the amount that 10 members can contribute as this is the

maximum amount of members allowed by the companies act.• Because capital is limited to 10 members it could hamper growth and

expansion of the business.• Private Company:• The capital potential of a private company is very large.• There is no maximum amount of shareholders according to the new

companies act (use to be 1 – 50).• This implies that a private company can at any stage increase its capital by

inviting more shareholders.• The shares of a private company are not freely transferable and the existing

shareholders must agree.• As there is no limit to the amount of shareholders in a private company,

growth and expansion is very possible.• The large numbers of shareholder have limited liability to the company and

only their investment would be in jeopardy should the company face financial difficulty.

•Public Company:• Shares in a public company are freely transferable.• Anyone can own shares in a public company and this increases

the possible capital of the business.• As there is no limit to the amount of shareholders in a public

company, large amounts of capital can be raised and growth and expansion is very possible.• Registered / nominal capital: the maximum amount of

capital which a company my raise according to the Memorandum of Incorporation (new act).• Issued / subscribed capital: Nominal values of shares

issued to the public.• Usually public companies are very larges businesses with huge

capital requirements.

The main aim of any business enterprise is to make a profit.Profitability is measured by relating profit to the capital (for a certain period) used to generate profit:

(Net profit before tax / total capital) x 100 = %Total capital = fixed assets + current assets – current liabilities

Profit is the positive gain from an investment or business operation after subtracting for all expenses

THE IMAPACT OF DIVISION OF PROFIT ON DIFFERENT FORMS OF OWNERSHIP

•Sole proprietorship:• All profits accrue to the owner.• As the owner is the only one sharing in the profits, he will be

very committed and hardworking.• It is important for the owner not to take all the profits out of

the business, but to re-invest some of the profits in the business so that it can grow and expand.

•Partnership:• The profits in a partnership belong to the partners.• The profit is shared according to the partnership agreement.• It is important for the partners to re-invest some of the profits

in the business so that it can grow and expand.• Each of the partners contributes skills, experience and capital

to the business.• The more skilled that partners, the more successful the

business = increased profits.

•Close Corporations:• The profit in a CC belongs to the business.• The profits are divided according to the founding statement of

the CC.• All members of the CC must agree on when profits will be

distributed and on the amount of money that will be kept in the business to grow the business.• Profits of a CC will be distributed to the maximum of 10

members.•Private Company:• The profit in a private company belongs to the business.• The profits are distributed to the shareholders according to the

class, preferences, rights and limitations of the shares held.• Shareholders must agree when the profits will be divided.• They all have to agree to the amount of money that needs to

be kept in the reserve fund of the business.• The distribution of profits requires the board of directors’

approval and need to satisfy the solvency and liquidity test.

•Public Company:• The profit in a public company belongs to the business.• The profits are distributed to the shareholders according to the

class, preferences, rights and limitations of the shares held.• Shareholders must agree at the AGM when the profits will be

divided.• They all have to agree to the amount of money that needs to

be kept in the reserve fund of the business.• The distribution of profits requires the board of directors’

approval and need to satisfy the solvency and liquidity test.

Various legislation impacts on business in South Africa.Some of these laws are specific to a form of ownership whilst others apply to all forms of ownership.

THE IMPACT OF LEGISLATION ON VARIOUS FORMS OF OWNERSHIP

Employment Equity Act• Small business (Sole trader, partnership and CC):• Business employing more than 50 employees needs to comply with the principles of affirmative action.• Only business that complies with EE requirements are allowed to transact with government.

• Large business (Partnership, private and public companies):• Employment policies of businesses must prohibit unfair discrimination.• Businesses must provide jobs for PDI’s.• Buildings must be adapted to accommodate the handicapped.• Morale of employees is low.

Skills Development Act• Small business (Sole trader, partnership and CC):• Business must register its employees with SARS if the annual salary

expense of the business is above R250 000.• Monthly skills development levy must only be paid to SARS if the

business salary expense is more than R250 000 per year.• Staff members can be sent on training courses which will impact on

productivity and profitability, especially in a small business with limited staff.

• In time business will reap the benefits of a skilled workforce.• Large business (Partnership, private and public companies):• Must pay monthly skills development levy of 1% of the total amount

payable to the employees.• Registration with SARS for payment of levy.• Calculation of the levy that is due each month.• Concluding Learnership agreements.• In time business will reap the rewards of a skilled workforce

National credit act•Large and small business:•Credit provider must provide a consumer with a quotation, showing all the relevant costs and repayment values before the credit agreement is signed.•Before granting credit, a credit provider must assess the consumer’s creditworthiness and ability to repay the credit.•This strict credit control results in a reduction of available credit.

Legislation specifically for Sole Trader• Income Tax Act (No 58 of 1962).•Tax is payable on all income received for the owner.•The owner has unlimited liability for the debts of the business.•The business is not recognised as a legal entity and there are no laws protecting the owners from bad business decisions.•Government recognise the contribution of small businesses to the economy and job creation and therefore small business can apply for government tenders

Legislation specifically for a Partnership• Income Tax Act (No 58 of 1962).•Tax is payable on all income received for the owners.•The owners have unlimited liability for the debts of the business as the partnership is not recognised as a separate legal entity.•The debt of one partner is also the debt of all the other partners.•The profit is shared according to the partnership agreement.

Legislation specifically for a Close Corporation• Close Corporations Act 1984.• Companies Act 71 of 2008.• The founding statement lays down the legal requirement in terms of

the amended CC’s Act.• According to Act 71 of 2008 no further registration of CC’s is allowed• Income Tax Act (No 58 of 1962).• Registration documents: Founding Statement (CK1)• Contents of CK1:• Full name of cc.• Postal address and physical address of the registered office.• Interests of members expressed as %.• Date on which financial ear ends.• Tax is payable on all income received for the owner.• The owner has unlimited liability for the debts of the business.• The business is not recognised as a legal entity and there are no laws

protecting the owners from bad business decisions.• Government recognise the contribution of small businesses to the

economy and job creation and therefore small business can apply for government tenders.

Legislation specifically for a Private Company:• Complicated, time consuming and expensive form of ownership to start.• Companies Act 71 of 2008.• Income Tax Act 58 of 1962.• Formation documents = Memorandum of incorporation (MOI).• Registration requirements: Notice of incorporation and signature of the MOI by number of persons and filing it with prescribed Notice of Incorporation at CIPC (Companies and Intellectual Properties Commission).• Shareholders can be minimum 1 and maximum unlimited.• At least one director needs to be appointed.• The name of the private company must end with the lettering (PTY) Ltd.

Legislation specifically for a Public Company• Complicated, time consuming and expensive form of ownership to start.• Companies Act 71 of 2008.• Income Tax Act 58 of 1962.• Formation documents = Memorandum of incorporation (MOI).• Registration requirements: Notice of incorporation and signature of the

MOI by number of persons and filing it with prescribed Notice of Incorporation at CIPC (Companies and Intellectual Properties Commission).• Shareholders can be minimum 1 and maximum unlimited.• At least three director needs to be appointed.• The name of the private company must end with the lettering Ltd.• MOI allows the company to make an offer of its securities to the public.• All financial information is freely available to the public.• Payment of dividends requires board approval and need to satisfy the

solvency and liquidity test.• Compulsory to audit financial statements.• Requires an AGM (Annual general meeting).• Required to provide a mechanism for electronic participation of

shareholder meeting.