Choosing a Form of Ownership in Business

Study Notes

A business's chosen form of ownership can significantly impact its success or failure.
Factors influencing success or failure include formation procedures, legal persona and liability, continuity of existence, tax implications, management and control aspects, and capital requirements.

The more complex the legal formalities for starting a business, the more expensive, time-consuming, and challenging it becomes to establish.

A business gains legal persona when registered, granting it limited liability.
This means the business can sue or be sued independently, shielding the owners from personal financial risk.

Businesses with legal persona have continuity of existence, meaning a change in ownership, like a death or retirement of an owner, does not affect the business's operations, increasing its chances of success.

In a progressive tax system, higher incomes are subject to higher tax percentages.
Sole traders and partners are taxed on their personal income/profits, potentially reaching a maximum of 45%.
Companies are taxed separately on generated profits, with a fixed percentage, often around 28%, and shareholders pay dividends tax.

Sole traders, partnerships, and close corporations typically involve owner participation in day-to-day management.
Companies usually separate ownership from management, with shareholders delegating management to a Board of Directors.

The size and nature of the business significantly influence capital requirements.
Manufacturers, especially those producing on a large scale, need more capital than service undertakings due to investments in machinery and equipment.
Businesses needing more capital may benefit from forms of ownership that allow for multiple owners contributing to capital.

Number of owners: There's only one owner, leading to potential advantages and disadvantages.
- Advantages:
  - Quick decision-making for flexibility in changing markets.
  - Reduced risk of missed opportunities due to the need for consultation with other owners.
  - Full ownership of profits, increasing motivation for success.
- Disadvantages:
  - Limited capital contributions, potentially restricting business expansion and growth.
  - Reliance on the owner's personal initiative, making discussions and alternative perspectives difficult.
  - Potential management issues during illness or vacation, possibly contributing to failure.

Starting a sole trader business is straightforward, requiring no specific legal procedures or formalities.
This simplifies the process, reduces costs, and potentially increases chances of success.

A sole trader cannot be registered as a separate legal entity from the owner.
As a result, the owner has unlimited liability for the business's debts and obligations.