Forms of Business Ownership

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Questions and Answers

What is the primary liability characteristic of business partners in a partnership?

Partners are jointly and severally responsible for the debts of the business.

What happens to a partnership if one partner leaves the business?

The business ceases to exist.

What is the maximum number of members allowed in a close corporation?

A close corporation can have a maximum of 10 members.

How does a close corporation protect its members from business debts?

<p>Members have limited liability, which means their personal assets are not at risk for business debts.</p> Signup and view all the answers

What must a public company have in terms of shareholders?

<p>A public company must have a minimum of 7 shareholders and can have an unlimited number.</p> Signup and view all the answers

What is a key advantage of forming a public company compared to a close corporation?

<p>A public company has unlimited continuity and is not dependent on the lifespan of its owners.</p> Signup and view all the answers

What is the legal status of a close corporation in relation to its owners?

<p>A close corporation is a legal entity separate from its owners.</p> Signup and view all the answers

What financial obligation do members of a close corporation have regarding profits?

<p>Profits must be shared between all the members.</p> Signup and view all the answers

What is a sole trader and what are the main advantages and disadvantages of this form of ownership?

<p>A sole trader is a business owned and operated by one individual. The main advantages include ease of setup and full control, while disadvantages include unlimited liability and lack of business continuity.</p> Signup and view all the answers

How does liability differ between sole traders and partnerships?

<p>Sole traders face unlimited liability, meaning personal assets are at risk for business debts, while partnerships also have unlimited liability but shared among all partners.</p> Signup and view all the answers

What are the characteristics of a partnership?

<p>A partnership is characterized by having 2-20 partners who share management, profits, and losses in an agreed ratio.</p> Signup and view all the answers

What are the tax implications for a sole trader's income?

<p>A sole trader pays personal tax on the business's profits as it is considered personal income.</p> Signup and view all the answers

What advantages do partnerships have over sole traders in terms of capital?

<p>Partnerships can access more capital because multiple partners contribute funds, unlike sole traders who are limited to their own resources.</p> Signup and view all the answers

Describe the decision-making process in a partnership.

<p>Decision-making in a partnership involves all partners collectively, which can lead to more thoughtful decisions, but it may also take longer.</p> Signup and view all the answers

What happens to a sole trader's business upon their retirement or death?

<p>The business ceases to exist if a sole trader retires or dies, as it has no continuity.</p> Signup and view all the answers

What are the two types of partners in a partnership and their roles?

<p>General partners are involved in managing the business, while limited partners invest but do not participate in daily operations.</p> Signup and view all the answers

Flashcards

Sole Trader

A business owned and run by one person, who keeps all profits but has unlimited liability.

Partnership

A business owned by two or more people (2-20), sharing profits and losses according to an agreement, and potentially having both general and limited partners.

Unlimited Liability (Sole Trader/Partnership)

The owner(s) are personally responsible for all business debts.

Limited liability

The owner(s) are not personally responsible for all the business's debts.

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Sole Trader Advantages

Easy setup, full control, keeps all profits, low start-up costs.

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Sole Trader Disadvantages

Unlimited liability, limited capital, difficult to expand, owner's personal assets at risk.

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Partnership Advantages

More capital, combined knowledge, potentially greater access to finance.

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Partnership Disadvantages

Decisions can be slower due to multiple stakeholders, potential conflicts between partners, shared liability.

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General Partner

A partner involved in the management of the business.

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Limited Partner

A partner who invests in the business but is not involved in managing it.

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Partnership Liability

Partners are jointly and severally liable for business debts. This means they are responsible both together as a group and individually.

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Partnership Unlimited Liability

In a partnership, personal assets can be used to pay business debts.

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Ease of Formation (Partnership)

Setting up a partnership is typically straightforward and simple.

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Partnership Dissolution

If a partner leaves the business, the entire partnership is dissolved and terminates.

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Close Corporation (CC) Members

A CC requires members (owners) to be natural persons (people), not companies or other entities.

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Close Corporation (CC) Liability

Close corporation members have limited liability, meaning their personal assets are protected from business debts.

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Close Corporation (CC) Ownership

Close corporations have 1-10 members and ownership is expressed as a percentage.

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Close Corporation (CC) Name

The name of a Close Corporation must end with "CC".

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Close Corporation (CC) Existence After 2011

Close corporations created before May 1, 2011, can continue to operate even after new regulations. However, starting a new one is now barred.

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Limited Membership (CC)

Close Corporations (CCs) are limited to a maximum of ten members.

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Public Company Ownership

Public companies are owned by shareholders who buy shares on the stock exchange (like the JSE).

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Public Company Shareholders

Public companies must have at least 7 shareholders and can have many more.

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Public Company Capital

Public companies raise capital by selling shares on the stock exchange.

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Public Company Tax

Public companies are legal entities and pay their own corporate taxes.

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Public Company Dividends

Profits distributed to shareholders are called dividends.

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Public Company Continuity

Public companies have unlimited continuity. They aren't affected by the death or changes in ownership.

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Study Notes

Forms of Business Ownership

  • Business ownership is categorized legally based on how the business is structured.
  • Entrepreneurs have several options with unique characteristics, advantages, and disadvantages.

Sole Trader/Proprietor

  • Characteristics:
    • Full business control by the owner.
    • Owner keeps all profits.
    • Low startup costs and easy setup.
    • Owner pays personal tax on business profits.
    • Business ceases if the owner dies, retires, or sells.
  • Advantages:
    • Easy and inexpensive setup (needs only a trading license).
    • Owner has complete business control.
    • All profits belong to the owner.
    • Quick decision-making.
  • Disadvantages:
    • Owner is liable for all business debts (unlimited liability).
    • Personal assets can be used to pay business debts.
    • Limited capital—only as much as the owner can provide.
    • Business closes if the owner is unwell or on holiday.
    • Financial statements do not need auditing.

Partnerships

  • Characteristics:
    • Owned by 2-20 partners.
    • More capital is available from multiple partners.
    • Managed by partners (combining skills).
    • Profits and losses are shared among partners per agreement.
    • Unlimited liability (personal assets can be used to pay business debts).
    • Two types of partners exist:
      • General partners: Manage the business.
      • Limited partners: Invest but don't run the business.
  • Advantages:
    • More capital from partners for business growth.
    • Easier to obtain funds than sole traders.
    • Combined skills, knowledge, ideas of partners lead to better decision-making.
  • Disadvantages:
    • Decisions can take longer as all partners must agree.
    • One partner's decisions can negatively impact others.
    • Partners share joint and individual responsibility for business debts.
    • Business ceases if a partner leaves.

Close Corporations (CC)

  • Characteristics:
    • Owned by 1-10 members (natural persons).
    • Members have limited liability (not responsible for business debts).
    • Member ownership is expressed as a percentage.
    • Business name must end with "CC."
    • No longer possible to start a new CC in South Africa after 2011 (pre-existing CCs can still operate).
  • Advantages:
    • Easy and inexpensive startup.
    • Members are not personally responsible for business debts.
    • Continues to exist if a member dies.
  • Disadvantages:
    • Maximum 10 members limits expansion potential.
    • Profits need to be shared between members.
    • Legal formalities (signed registered agreement required).
    • Higher tax rates.

Public Companies

  • Characteristics:
    • Owned by shareholders.
    • Minimum 7 shareholders, potentially unlimited.
    • Capital raised by selling shares on the JSE.
    • Shareholders become part owners.
    • Company is a separate legal entity paying company tax on profits.
    • Profits are distributed to shareholders as dividends.
    • Business has unlimited continuity.
    • Company has a board of directors.

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