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From Wikipedia, the free encyclopedia

This article does not state which jurisdiction it applies to.

A form of ownership is the manner in which

  • an undertaking or enterprise is managed and controlled;
  • capital is contributed;
  • risks are borne;
  • profits are divided; and
  • legal personality affects the business.

Contents

Sole Proprietorship

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Characteristics

  • The sole proprietorship has only one owner.
  • It is managed either by the owner or by a manager appointed and remunerated by the owner.
  • There are little or no legislative acts governing the formation of the sole proprietorship.
  • It needs only a trading licence, with no legal formalities.
  • The owner's liability for the debts of the business is unlimited. (The owner's personal assets may be sold to pay off debts.)
  • The owner may choose any name for his business. There is no legal prescription, so there may be numerous businesses trading under the same name.
  • The sole proprietorship has no legal personality.
  • The owner contributes all capital, which may, however, be borrowed.
  • The owner may sell the enterprise whenever he/she wants, to whomever he/she wants.
  • The owner takes all profits.
  • The business has no continuity: if the owner dies, the enterprise dissolves.
  • Auditing financial statements is unnecessary.
  • A balance sheet, however, may be required by a loan-granting bank.
  • The owner is the legal entity; he, therefore, is the one responsible for income tax, paid in his personal capacity.

Advantages

  • The sole proprietorship is easily established, there being no legal formalities.
  • Owner takes all profits.
  • There are no overhead expenses required in the establishment.
  • It allows for quick and free decision-making.
  • The owner may gain experience of all aspects of the business world.
  • If the owner puts all of his/her abilities into the enterprise, all of them may be utilised to his/her benefit.
  • Ownership easily transferred.
  • Close ties can develop between the owner and his/her customers and employees, and this generally leads to faithfulness.
  • A large number of sole traders in one area leads to good competition, which will benefit both owners and consumers.
  • Such a business can adapt comparatively easily to changing conditions.

Disadvantages

  • The owner has unlimited liability because his/her personal assets may be sold in order to pay for the debts of the business.
  • There is no continuity.
  • Because there are a limited number of assets to give as security, it is difficult to obtain a loan.
  • It is not easy to acquire good, qualified staff, as there is little to offer them in the way of promotion.
  • Salaries paid to workers are normally lower than the salaries that bigger companies can offer.
  • The owner is usually responsible for all managerial functions, often without the necessary expertise and experience.
  • Competition is usually strong.
  • Prices offered to consumers by sole traders are usually far higher than those of the other forms of ownership, and consumers generally buy where it is cheapest to do so.
  • There is usually a limited amount of capital with which to expand the business.
  • The owner is the only person with direct interest in the business. His/her decisions depend solely on his/her judgement. Wrong decisions are often made.
  • If the owner is not wholly dedicated to business, he/she will suffer the effects directly.

Income Tax

The sole proprietorship does not pay tax per se, because the one-man business is not a legal personality. The sole proprietor himself, however, does pay income tax in his private capacity.

Partnership

A partnership is an agreement between two to twenty (limited by law) persons to contribute money, labour and skill to a business and to run it for the benefit of all, dividing profits or losses in agreed proportions.

Reasons for the formation of a Partnership

  • In the case of a sole proprietorship or close corporation, the owner/s may want to increase the business's capital for the purposes of expansion.
  • Two or more people may want to combine their skills, personal qualities and administrational abilities with a view to greater efficiency.
  • The owner/s may want to retain the services of a competent employee by giving him/her a stake in the business.
  • The amalgamation of competing firms helps to eliminate harmful competition.
  • Family interest in a business can be ensured by employing a younger relative or child.
  • Sharing the burdens and responsibilities amongst partners helps to ease the stress on the individual.

Types of Partnerships

Basically, there are two distinguishable types of partnerships:

  • General partners
  • Special partners

The general partnership is the most common type, and members are known simply as partners. They all take an active part in the management of the partnership and are jointly and severally liable for the debts of the enterprise.

In the case of special partners, three more sub-categories can be distinguished:

The Anonymous Partner

This type of partner contributes only to the capital of the business and is not known strictly as a business partner. Uninvolved in the management of the partnership, they are known also as sleeping partners.

Partner en Commandite

This is a commandite partner, whose liability to the debts of the business is limited. They are not really known as partners either, for they do not play an active role in the management of the business.

Limited Partner

The liability of this type of partner is limited: it does not play any role in the management of the partnership.

Rights and Duties of Partners

  • Each partner becomes an agent of the partnership. It follows, therefore, that each partner has the authority to execute all sorts of acts incidental to the proper conduct of the business and, as such, bind their fellow partners to their actions.
  • A partnership is a contract of utmost good faith. Partners should be sincere and honest in their dealings with clients and co-partners.
  • The partners are both jointly liable, as well as liable severally for the debts of the business settled by themselves individually.
  • The relationship between partners is one of mutual trust and confidence. Consequently, a partner may acquire and retain for him/herself any benefit or advantage which falls within the scope of the partnership. If a partner commits a criminal act in furtherance of the interest of the partnership, each member of the partnership is deemed to be guilty of the offence unless it is proven that they did not take part in and could not have prevented the offence.
  • Each partner is entitled to full information regarding the affairs of the partnership. He/she and his/her adviser must have free access to the books and accounts.

Formation

Except in the case of a limited partnership, any partnership may be formed by an oral or written agreement. It is, nevertheless, advisable to get the help of an attorney in drawing up a written contract, known as the partnership articles. Each partner should sign the partnership articles, thereby binding themselves to its stipulations. If a written contract does not exist, disputes are settled in terms of the principles of the common law.

Contents of the Partnership Agreement

  • Nature and aim of the business.
  • Address of the partnership.
  • Duration of the partnership.
  • Rights, powers and duties of partners.
  • Chosen name.
  • Decisions about financial year end and books.
  • Partners' names.
  • Contribution of each partner.
  • Proportion in which profits and losses are to be divided.
  • Name of the person who will manage the partnership and sign the cheques.
  • Division of tasks between partners.
  • Rules for taking leave.
  • Life insurance requirements of partners.
  • Arbitration clause.
  • Interest payable on capital and drawings.
  • Salaries payable to partners.
  • Dissolution procedure.

Characteristics

  • There is a minimum of two and a maximum of twenty partners (while, in professional enterprises, this number is unlimited).
  • The partnership is managed by one or more partners or an employed manager, as agreed upon by the partners.
  • The partners are jointly, severally and unlimitedly liable for the debts of the undertaking.
  • The partnership enterprise may be given any name, but it is generally in plural form or includes the word "and".
  • It has no legal personality.
  • Each partner contributes capital, not necessarily in the form of money, to the business.
  • There are no legal acts governing formation.
  • A partner cannot sell his/her share in the business to anyone else without the consent of the other partners. This is fittingly bracketed with "complications".
  • Profits are divided between partners according to stipulations in the partnership agreement, the only legal document that the partnership requires.
  • The partnership has no continuity. If one partner dies, retires or is declared insolvent, the entire enterprise must dissolve. The remaining partners may then, of course, come to a new agreement and establish a new partnership.
  • It is not necessary to audit a partnership's financial statements; however, if a partner smells a rat, he/she is more than welcome to do a spot of auditing at his/her own expense.
  • By the same token, it is unnecessary to compile a balance sheet, although it would be wise to do so.
  • The partnership is not a legal entity. It stays with the partners and doesn't pay income tax; the partners do so in their respective personal capacities.
  • A partner is an agent of the partnership and signs contracts on its behalf.

Reasons why a partnership may be dissolved

  • The partners themselves decide to do so.
  • A new partner is admitted.
  • A partner dies, retires or is declared insolvent.
  • The objectives of the partnership have been completed.
  • The court makes an order to this effect.

Advantages

  • A partnership is relatively easy to start. There are no prescribed legal formalities.
  • There are low additional expenses for establishment, although it is preferable to acquire a written agreement, compiled by an attorney, which can be very costly.
  • Joint decision-making may lead to better results.
  • Capital can be increased easily, without legal procedures.
  • It enables better personal contact with clients.
  • It is financially stronger, more stable and easier to expand than a sole proprietorship.
  • There is usually a strong personal interest in the partnership, especially with family orientated ones.
  • Workload and responsibility is divided between the partners.
  • A partner can specialise in the aspect of the business world to which he/she is best suited.
  • The partnership is not subject to different legal regulations, as is the case with companies.
  • The joint and several liability of the partners helps to increase the partnership's creditworthiness.

Disadvantages

  • Ordinary partners are jointly, severally and unlimitedly liable for the debts of the partnership.
  • It has no continuity -- vis-à-vis it must dissolve when a partner dies, retires or is declared insolvent, or when a new partner enters the business.
  • Capital cannot be contributed by more than twenty members.
  • A difference of opinions may delay the decision-making process, for all partners must be included in decision-making.
  • Urgent decisions, therefore, are not easily taken.
  • Because financial statements are not audited, fraud can occur.
  • Each partner acts as an agent of the partnership. When one partner signs a contract on behalf of the business, the other partners are bound to it, irrespective of their objections.

Income Tax

The same principles which apply to sole proprietorships apply also to partnerships. Although the partnership itself does not pay income tax, its members do.

Close Corporation

Characteristics

  • One to ten members.
  • Name must end in "CC".
  • Has legal personality.
  • Limited liability.
  • Unlimited continuity.
  • Managed by the members.
  • Taxed on profits.
  • Governed by the Act on Close Corporations, No. 69 of 1984.
  • Requires a Founding Statement and Certificate of Incorporation for formation.

Advantages

  • A CC obtains funds more easily than a sole trader.
  • Limited liability.
  • Easy and inexpensive to establish.
  • Annual meetings not required.
  • Easy to change the Founding Statement (making it an Amended Founding Statement).
  • Members' interest does not have to be in proportion to contributions.
  • Financial statements do not have to be audited.
  • A CC may acquire the interest of a member.
  • Unlimited continuity.

Disadvantages

  • Relies on mutual trust between members.
  • A member acts as an agent for his CC and binds all other members to his actions.
  • Members can lose limited liability.
  • Restriction to only ten members can hamper growth.
  • Disposal of a member's interest requires consent of all other members.
  • A Close Corporation cannot be sold to a company.

Contents of the Founding Statement

  • Name must end in letters "CC".
  • Principal business activity.
  • Postal and physical address.
  • Details of each member's contribution.
  • Size (expressed as a percentage) of each member's contribution.
  • Name and address of accounting officer.
  • Date of financial year-end.

Private Company

Characteristics

  • One to fifty shareholders.
  • Name must end "(Pvt) Ltd"
  • Has legal personality.
  • Limited liability.
  • Unlimited continuity.
  • Managed by a board of directors, comprising a minimum of one person.
  • Taxation charged on company's profits.
  • Governed by Companies Act 61 of 1973.
  • Requires the Memorandum of Association, Articles of Association and Certificate of Incorporation to commence with business.

Advantages

  • Limited liability.
  • Not subject to legal requirements of a public company.
  • No minimum subscription required.
  • Ideal for a business requiring privacy.
  • Relatively easy to raise sufficient capital (via shares).
  • Suitable for entrepreneurs with limited capital but inventive ideas.

Disadvantages

  • Shares cannot be sold to the public.
  • Shares not freely transferable; cannot be listed on a stock exchange.
  • Management problems often arise.
  • Not suitable for very large businesses.

Contents of the Memorandum of Association

  • Name Clause.
  • Objectives Clause.
  • Limited Liability Clause.
  • Share Capital Clause.

Contents of the Articles of Association

  • Shares, certificates and variations of rights.
  • Meetings.
  • Accounting records.
  • Directors.
  • Dividends and reserves.
  • Postal and physical address.
  • Registration-fee receipts.
  • Payment of annual duty.
  • List of directors.
  • Written undertaking of directors to take shares.

Public Company

Characteristics

  • Minimum of one member, Corporations Act s 114
  • Name must end in "Ltd".
  • Has legal personality.
  • Limited liability.
  • Unlimited continuity.
  • Managed board of directors, with a minimum of one person.
  • Taxed on profits.
  • Governed by Companies Act No. 61 of 1973.
  • Requires for formation all of the Memorandum of Association, Articles of Association, Certificate of Incorporation, Prospectus and Certificate to commence business.

Advantages

  • Can raise large amounts of capital—through both shares and debentures.
  • Unlimited lifespan; shares are freely transferable.
  • Has legal personality; may trade under its own name.
  • Shareholders' liability is limited.
  • Generally managed by competent directors, elected by the many shareholders.
  • People with small amounts of money may still invest.
  • Strict requirements of the Companies Act protect shareholders.
  • Losses spread over all shareholders.
  • Risk can be spread by investing in multiple public companies.

Disadvantages

  • Directors not always able to manage companies as effectively as sole traders and partners.
  • Formation expenses are high.
  • Tax burden is greater than in other forms of ownership.
  • Administrative costs are high.
  • Management separate from ownership.
  • Financial statements are available to competitors.
  • Procedure of establishment is complicated.
  • The failure of a public company affects thousands.
  • Memorandum not easily altered.
  • Numerous legal formalities.
  • Often conducive to monopolies.

Contents of the prospectus

  • Date of incorporation and company address.
  • Main objectives of the company.
  • Name and address of the managing director.
  • Details of shares and debentures available.
  • Details of share capitals.
  • Statement that the prospectus has been registered.
  • Names and details of directors.
  • Preferential rights in respect of shares.
  • Amounts payable to promoters.
  • History of the company and its state of affairs.
  • Contents of the Memorandum of Association.
  • Details of preliminary expenses.
  • Minimum subscription to be raised by issuance of shares.
  • Details of any contracts into prior to the issuance of the prospectus.

Amalgamation

  • Horizontal amalgamation occurs when two companies in the same industry merge.
  • Vertical amalgamation occurs when two companies in different industries merge.

Holding and controlling companies

  • A holding company purchases at least thirty per cent of the issued capital of another company and controls the composition of the board of directors of the subsidiary.
  • A controlling company owns the majority (more than fifty per cent) of the issued equity shares of a controlled company and is entitled to exercise the majority of the voting rights and can appoint most directors.

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