Forms of Business Ownership

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Questions and Answers

Explain how the legal persona of a business impacts its continuity of existence, particularly if the owner dies or ownership changes.

If a business is registered as a legal persona, it exists as an entity independent of the owner. Therefore, the business's continuity remains unaffected by the owner's death or changes in ownership.

How does the tax implications of a sole proprietorship change as the profit of the business increases relative to the tax rate applied to companies?

If the profits are below R272 701 per annum, the owner will pay tax at a maximum rate of 25%, which is lower than that of companies. But if the profit exceeds R272 701, the owner will be taxed at a rate higher than 28% and then it becomes a disadvantage.

Analyze how a partnership's structure, specifically the absence of a required written agreement, can affect dispute resolution in court.

Without a written partnership agreement, resolving disagreements in court can become complicated, because there may be disputes about the terms and conditions of the partnership.

Describe how the 'jointly and severally liable' aspect of partnerships affects each partner's financial responsibility for the business's debt.

Each partner is completely responsible for the debt. If one partner creates debt for the business, all partners are responsible in their personal capacities for the debt. Signup and view all the answers

Discuss the trade-offs in decision-making speed and quality between a sole proprietorship and a partnership.

In a sole proprietorship, the owner can make quick decisions, but may not have the chance to discuss ideas. In a partnership, decision-making may be slower because more people have to be consulted, but there input from many people may result in better decisions. Signup and view all the answers

Explain how the ability to raise capital differs between sole proprietorships and partnerships.

A sole proprietor only contributes capital himself, while in a partnership there are multiple people who can contribute capital to the business. Signup and view all the answers

Analyze the implications of the Companies Act requiring a Memorandum of Incorporation (MOI) specifying that shares are not offered to the public for private companies.

This means that private companies are not allowed to raise capital from the public. Signup and view all the answers

Discuss how the solvency and liquidity tests serve to protect the interests of a company's stakeholders before dividends are distributed.

The tests make sure that assets exceed liabilities and that the company has the ability to settle its debts that will become due in the next 12 months. Signup and view all the answers

Explain why public companies are required to have their Annual Financial Statements (AFS) audited, while private companies do not share the same requirement.

Public companies must have their AFS audited to provide transparency to investors and the public who invest in the company's stock. Private companies, however, do not have this requirement. Signup and view all the answers

A company secretary is required to do what?

The company secretary is required to make the directors aware of relevant legislation, give guidance to directors where needed, make sure minutes are recorded according to the correct procedures and that all required documents are filed with CIPC. Signup and view all the answers

Explain how the cost factor may cause one to choose a sole trader business over establishing a company, especially in light of limited liability.

Although a risk of unlimited liability when running a sole trader or partnership. There is a cost factor to establishing a company. Signup and view all the answers

Analyze the different tax rates applicable to sole proprietorships versus companies. Explain which one is more advantageous depending on profit generated.

If the profit is below R272 701 per annum, the tax rate for individual is lower than for a company and it is then a disadvantage for the business to pay tax at 28%. If the net profit exceeds R272 701 the tax rate would have been more than 28% and it is therefore to the advantage of the business to pay a flat rate of 28% tax. Signup and view all the answers

Explain the significance of including details about the purchase price, address, and mode of payment in a prospectus if the IPO is purposed towards raising capital for buying a specific business venture.

Details on the transaction need to be transparent. This will include what the purchase price is, the address of the property of the business venture, how much is paid in cash and how the rest of the purchase price will be defrayed. Signup and view all the answers

Describe the key duties of directors, including the aspects of acting in good faith and disclosing potential conflicts of interest.

Directors have a duty to act in the best interest of the company, Directors should also act in good faith ,and a Director is obliged to disclose interests to prevent a conflict of interest if it may be construed that the Director, in order to benefit personally, acted to the disadvantage of the company. Signup and view all the answers

Explain the formation procedures of registering a company, highlighting the significance of the Memorandum of Incorporation (MOI).

The person or people who want to register the company have to pay the required fee, complete a Notice of Incorporation and register a Memorandum of Incorporation (MOI). The Memorandum of Incorporation stipulates the different types of shares that will be sold and the associated rights, duties and responsibilities of the shareholders, describes the duties, responsibilities and liabilities of directors and may impose stricter or more rigorous requirements on directors. Signup and view all the answers

Flashcards

Formation procedure

Some businesses must register formally, while others don't need a formal process.

Legal persona

If the law requires the business to be registered, it becomes a separate legal person from the owner

Continuity of existence

The business exists as an entity independently of the owner.If the owner dies the business is not affected.

Limited liability

If registered separately, the business is responsible for its debts, shielding the owner's personal assets.