choosing correct legal structure is a very important decision – influences how business operates....

FORMS OF OWNERSHIP

Factors influencing forms of ownership

Choosing correct legal structure is a VERY important decision – influences how business operates.

We examine…• SOLE TRADER• PARTNERSHIPS• COMPANIES

1.1. The autonomy of the enterpriseDoes enterprise have a legal personality (incorporated)?

If incorporated…• Business NOT owners responsible for business debts.• Business has unlimited lifespan - not dependant on life span

of owners• Ownership is transferable

1.2. Establishment procedures and administrative requirementsHow much red tape do you want to encounter?

1.3. Ownership and management

• Extent to which owners share in the management, profits and losses varies. •Where more than one owner - mutual agreement on these

issues.

1.4. Potential for the procurement of capital.

• Nature & size of enterprise determines capital required. • Future capital requirements also important.

1.5. Tax considerations

• Unique tax structures • Sole proprietorship & partnerships pay tax in personal capacity • Close corporations & companies pay tax at a fixed rate.

1. SOLE TRADERSole Trader: owner of the business manages and controls the business.

Characteristics of a Sole Trader

Legal autonomyNo legal autonomy. Business and the owner one and the same.

Liability Unlimited: debts of business = debts of individual. Personal assets can be taken to pay debts of business.

Continuity. Limited: business ceases to exist in current form when owner dies.

Establishment procedures & admin requirements. Simple and inexpensive.

Ownership One owner

Management and control Owner manages and controls the business

Capital procurement potential Limited to creditworthiness of the owner. Makes growth difficult.

Tax Structure No company tax - taxed in personal capacity i.e. income tax.

Easy to establish Owner responsible for liabilities of business.

Easy to manage Personal focus to detriment of business.

Owner receives all profits Procuring capital limited to creditworthiness of owner.

Owner has personal interest in success of business

Death of the owner ends business in current form.

2. PARTNERSHIPSPartnership: group of professional like-minded people who join their individual skill, management roles, capital and administration knowledge to form one business .

Characteristics of a Partnership:Legal autonomy Business & owners viewed as one entity

Liability Debts of business = debts of individuals

Continuity Limited: if one partner dies/retires partnership ceases to exist in current form.

Establishment procedures and

administrative requirements.

Simple and inexpensive. Partnership Articles (Deeds) signed. Contains info on… main activity of the business disputes settlement capital contributed by the owners name and details of partners duties of partners.

Ownership2 – 20 partners

Management and control Partners manage & control business.Capital procurement potential Limited to creditworthiness of partners. Growth and expansion can

be hampered.Tax Structure No company tax, taxed in personal capacity i.e. income tax on

share of profits.

Skill, capital, management and objectives combined. No separate legal identity = continuity & unlimited liability.

Inexpensive and simple to form. Only 20 members = restricts ability to grow.

Each partner liable for own debts = high productivity. Disputes can lead to a tension/breakup of business.

‘Monopolies’ can be formed and competition eliminated.

Raises capital by selling shares in the business.Owners are shareholders of the company. Limited liability.Must be legally registered with government as separate from owners. • Notice of Incorporation • Memorandum of Incorporation• Submitted to Companies and Intellectual Property Commission (CIPC),

More admin & legal requirements than any other form of business.

2. COMPANIES

Company is a separate legal entity, Shareholders can only lose money spent buying shares

We focus of two types of companies1. private company 2. public company

1. Private company• ‘Private' - not everyone may buy a share in that company. • Shares can only be sold if all the other shareholders agree to the sale. • (Pty) - private Ltd - limited liability.

• ‘Public' - anyone from the public or any business can buy and sell its shares. • Ltd. – limited liability

1. Public company

Characteristics of Companies:Legal autonomy Yes

Liability. Shareholders have limited liability

Continuity. Unlimited

Establishment procedures and administrative requirements.

Not easy to form. Notice of Incorporation + Memorandum of Incorporation (MOI) sent to the CIPC.

Ownership Minimum of one, with no limit to the maximum number

Management and control Owners (shareholders) do not manage the business but appoint directors to manage the business for them.

Capital procurement potential. Can list on JSE. Capital raised issuing shares to the public.

Tax Structure. A company has to pay tax on its profits as it is regarded as a 'legal' person.

Separate legal identity - continues to exist even if original shareholders die or sell shares.

More work to start a company than other forms of ownership.

Shareholders have limited liability.

Managed by directors not ownersOwners must ensure that directors make decisions that put interests of shareholders first.

Public companies and the JSE

Public companies allowed to list on JSE. Capital can be raised by issuing shares to the public. Public can freely trade shares on stock market.

Value or "size" of a publicly traded company called market capitalization

Market capitalization = number of shares issued x price per share

Company profits… • retained by the business • paid to shareholders (dividends).

Dividends paid per share owned. Example… • company makes R1m profit • distributes the between 200 000 shares = dividend of R5 per share• Mr X owns 250 shares therefore he receives 250shares x R250/share = R1

250 in dividends.

Trade volume: number of trades in a given period of time.

Share price determined by demand for and supply of shares at any given time.