Business Enterprise Forms

Form of Business Enterprise

• Business enterprise form is the legal structure entrepreneurs choose to conduct business.
• It defines ownership, management, operation, legal responsibilities, and liabilities.
• This form determines taxation, ownership rights, decision-making, and liability protection.

Forms of Business Enterprise

• Main forms include sole proprietorship, partnership, corporation, and limited liability company (LLC).
• Sole Proprietorship: Owned/operated by one person with full control/profits but unlimited liability.
• Partnership: Owned/operated by two or more sharing profits/losses/management; can be general or limited.
• Corporation: A separate entity with shareholder's limited liability, managed by directors, profits as dividends.
• Limited Liability Company (LLC): Combines partnership/corporation, providing member liability protection with management/taxation flexibility.

Factors Influencing Choice of Enterprise

• Factors include liability, control, taxation preferences, capital needs, and business continuity concerns.
• Regulatory compliance and desired management structure (centralized vs. decentralized) also influence.

Sole Proprietorship Attributes

• Owned/operated by one person and is the simplest form, the owner has full control of decision-making.
• All profits and losses are directly attributed to the owner.

Sole Proprietorship Advantages

• Easy to establish and dissolve with the owner retaining all profits and has simplified taxation.
• Profits are taxed at individual income tax rates.

Sole Proprietorship Disadvantages

• Unlimited personal liability for debts/obligations with has limited access to capital.
• Lacks continuity beyond the owner's lifespan.

Partnership Attributes

• Owned/operated by two or more sharing profits/losses/management, and the partnership can be general or limited.
• The type of partnership depends on liability structure.

Partnership Advantages

• Shared management and resources, and access to diverse skills and expertise.
• Simplified taxation when profits are taxed at individual income tax rates.

Partnership Disadvantages

• Unlimited liability for general partners, potential for partner conflicts, and lack of continuity if a partner leaves.

Corporation Attributes

• A separate legal entity owned by shareholders, managed by a board of directors and shareholders have limited liability.
• It has perpetual existence independent of ownership changes.

Corporation Advantages

• Limited liability protects shareholders' assets, easier access to capital through stock issuance.
• Perpetual existence facilitates continuity and long-term planning.

Corporation Disadvantages

• Complex and costly to establish/maintain with double taxation on profits.
• Corporate income tax and individual dividend tax.
• Extensive regulatory requirements and compliance obligations.

Limited Liability Company (LLC) Attributes

• Combines features of partnerships/corporations, members have limited liability like shareholders.
• It has a flexible management structure and pass-through taxation.

Limited Liability Company (LLC) Advantages

• Limited liability protects members' personal assets, flexible structure, and pass-through taxation avoids double taxation.

Limited Liability Company (LLC) Disadvantages

• Complexity in formation/operation varies by state, and there is potential for member disputes.
• Legal treatment/recognition may vary across jurisdictions.

Relevant Establishment Procedures

• Sole Proprietorship: No formal registration may need licenses/permits based on business.
• Partnership: Partnership agreement, registration with state, and obtaining necessary licenses/permits.
• Corporation: Filing articles of incorporation with the state, appointing directors/officers, and issuance of stock certificates.
• Compliance with state and federal regulations.
• Limited Liability Company (LLC): Filing articles of organization, operating agreement, and registration for taxes/permits.

Statutory Requirements

• Tax registration and compliance (income/value-added tax).
• Employment tax and labor law compliance (payroll taxes, employee benefits, workplace safety).
• Compliance with intellectual property laws (trademarks, copyrights, patents).
• Regulatory compliance with industry-specific laws/regulations, business licensing, and permits as required.

Free Market System and Legal Regulation

• South Africa operates within a free market system and state laws regulate business operations.
• State laws curtail entrepreneurial freedom.

Choice of Business Enterprise Form

• Applicable laws are important when choosing a legal structure.
• Common forms include sole proprietorships, partnerships, close corporations, and companies.
• Close corporations are no longer available for new entities under the Companies Act of 2008.
• Cooperative and business trusts are also available, but less common.

Factors Influencing Choice

• Choice depends on capital, desired skills, control, legal factors, and potential risks.
• Forms vary in cost, complexity of formation, owner liability for debts.
• Sole proprietorship is least expensive/complex; public companies are the most expensive/complex to run.

Purpose and Criteria for Selection

• The chapter aims to present common forms and their criteria to assist entrepreneurs.
• Each form has advantages/disadvantages.
• The decision depends on business activity and the entrepreneur's vision.

Statutory Requirements

• Statutory requirements apply to all forms, including tax, labor, and general legislation.
• Entrepreneurs must comply with these requirements set by the government.

Distinguishing Factors: Business Activities

• Small firms may begin informally but should consider legal forms as they expand.
• Sole proprietorship/partnership initially transitions to a company for legal protection and raising capital.

Distinguishing Factors: Legal Personality

• Legal personality determines if the business is legally distinct from its owners.
• Entities lacking legal personality are sole proprietorships and partnerships.

Distinguishing Factors: Perpetual Succession

• Perpetual succession determines the ease of ownership transfer and the company's continuity.
• Legal personality forms (companies) continue without the owner, other forms cease upon owner's exit.

Distinguishing Factors: Liability of Owners

• Liability of owners refers to the extent of the owner's liability for business debts.
• Unlimited liability in sole proprietorships/partnerships and limited liability in companies/close corporations.

Distinguishing Factors: Potential to Raise Capital

• Potential to raise capital depends on the security owners and availability of own/borrowed capital.
• Sole proprietors are limited to personal resources and companies have the greatest capacity to raise capital.

Distinguishing Factors: Profit Sharing, Management, and Income Tax

• Sole proprietors keep all profits; other forms distribute profit according to the ownership agreement.
• Owners' role in decision-making and business activities indicate management’s participation.
• Sole proprietors/partners are taxed at personal rates with companies being taxed separately.

Distinguishing Factors: Requirements and Costs

• Simpler and less costly are sole proprietorships and partnerships and are regulated by the Companies Act.

Forms of Business Enterprises: Partnership Attributes

• A partnership is formed by two or more sharing profits and liabilities.
• It has an opportunity to combine skills, resources, shared responsibility, with improved decision-making.
• No legal personality, joint/several liability, required profit sharing, conflict risk, and limited growth potential.

Close Corporations

• A close corporation has a maximum of 10 members, each with percentage ownership, legal personality, and has limited liability.
• Few legal requirements, flexible, easy transfer, with a perpetual succession membership interests
• Members have limited growth but unlimited liability for tax debts.

Definitions of Enterprise Forms

• A sole proprietorship is managed by one entrepreneur under their name or a trade name.
• A partnership is up to 20 people, agreeing to contribute money, labor, or skill to a common stock.
• A close corporation (CC) is flexible, inexpensive for a single entrepreneur or up to 10 people in business.
• A company is a juristic person incorporated under the Companies Act 71 of 2008 with the intention of acquiring gain.

Tax Legislation and Compliance

• Income Tax: Governed by the Income Tax Act(Act 58 of 1962), registration with SARS required.
• Value Added Tax (VAT): Registration is compulsory exceeding R1,000,000, standard rate of 14%.
• Employee Tax (PAYE): Employers register with SARS and deduct PAYE from remuneration to it.

Labour Legislation

• Employment Acts: Laborelations, Employment Equity, Basic Conditions etc which is the act 66 of 1995 and 75 of 1997.
• Skills Development: South African Qualification Authority Act (Act 97 of 1998) is the act 58 of 1995
• Development Levies Act which is the act 9 of 1999.

General Laws and Regulations

• Contractual Capacity: Parties must have legal capacity and Compliance with the Business Names Act.
• (Act 27 of 1960) is necessary with the Intellectual Property and certain Licneses, B-BBEE compliance.
• Competition. Consumer and the Consumer Protection Act governs with Importing and Exporting regulations.

Establishing a Business Checklist

• Includes determining a business field, feasibility study & plan, and identify target market.
• Includes secure premises, register business name, setup the businesss contacts and and utilities.
• A business registration requires you to formalize, obtain licenses and permits, banking and regulations.
• An entrepreneur needs Tax and regulatory registration and insurance records, equipments as well as a digital system.
• Need to keep record, B-BBEE records and maintain it if needed.
• Maintain human resources as well as legal complaince.
• Market and plan to proomote and launch offers, special marketing offers etc.