Arguments for forms of ownership

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 proprietorship
Arguments 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.

Partnership
Arguments 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 Corporation
Arguments 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 Company
Arguments 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 Company
Arguments 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.
• 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

• 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.
• 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.
• 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).

• 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.
• 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

• 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.

• 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.
• 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

• 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.

• 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.
• 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.
• 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.
• 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.

Arguments for forms of ownership

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