Forms Of Ownership 2023 PDF

FORMS OF OWNERSHIP CHAPTER 2 Choosing the correct form of ownership… Legal Person a Formatio Liabilit n Procedur y for es...

FORMS OF OWNERSHIP CHAPTER 2 Choosing the correct form of ownership… Legal Person a Formatio Liabilit n Procedur y for es debts Correct form of Capital – ownersh Tax Size of the ip Implicatio ns business Manageme Continui nt and Control ty Legal Persona Legal Persona refers to the legal right of a business or person to enter into contracts, own property and sue or be sued. Obtain LEGAL PERSONALITY when the business is registered. Business operates separately from its owners – owners personal assets are protected. Liability for the debts of the business Liability refers to what or who will take responsibility for the debt of the business. The OWNER either has limited or unlimited liability for the debts of the business. UNLIMITED = the owner is seen as one with the business and personal items may be used to settle the debts of the business. LIMITED = the owner and the business are seen as separate entities and their personal items may not be used to settle the debts of the business. Legal Personality and Liability and Form of Ownership Legal Form of Ownership Personality Application: and Liability Cannot be registered and therefore is not seen as separate to the business. Owners/Partners are responsible for the debts of No Legal the business. Sole Traders and Personality and Owners may not willing to take Partnerships Unlimited risks Liability All decisions are well calculated and planned, owners work harder as a personal possessions are at risk. Personal belongings are not at Have Legal risk therefore owners are more Companies Personality and willing to take risks. Limited Liability Risks that could lead to expansion and growth. Tax Implications Tax implications refers to who will be responsible to pay the tax on the profits - the owner of the business. South Africa – Progressive tax system = the more the person earns the more tax they pay – Current Maximum is 45% Registered businesses pay proportional tax – fixed amount of 27% regardless of the profits made. Dividends tax – additional 20% Dividends = money made on shares owned in a business Tax Form of Ownership Tax Application: Implication s and Form If profits are small then lower tax paid (27%) pay of Sole Trader and 45% less tax than a Company Large profits will result in Ownership Partnership max 45% tax which will limit growth and Expansion. Business pays a fixed rate so if profits are high less 27% and tax would be paid than a 20% Companies ST or P. Profit are low can dividends apply for micro business tax status. Continuity A business will only have continuity of existence if the business is a legal entity separate from its owners – registered business. If the business has continuity, the death or retirement of the owners will not affect the existence of the business. Sole Trade and Partnerships – No Continuity Companies -- Continuity  Form of Continuity Ownership Continuity Application and Form The business cannot continue of without its owners. Ownershi If the owner/partner p Sole Trader and NONE leaves the business Partnership will cease to exist. Partnerships no longer exist as they were and agreement needs to be adjusted The business can continue to exist even with a change in ownership. HAVE Companies Owners coming CONTINUITY and going have little impact on the running of the company. Management and Control The owner of the business decides how involved they are in the day to day running of the business. The owner at any time can appoint a manager to run the business if it is a sole trader / partnership In a company, shareholders usually delegate the running of the company to a board of directors – separation between ownership and management.  MANAGEMENT AND CONTROL SOLE TRADER: Quick to make PARTNERSHIP: COMPANIES : decisions Flexible More Capital Board of No conflict as All 20 actively directors no one to involved in appointed by discuss management shareholders decisions with. – more skills at AGM Owner gets all More than Directors are the profits – be one person performance more can make orientated. motivated to important (Drive to do do well. decisions. well) CHALLENGES: CHALLENGES: CHALLENGES: Lacks Time Time Expertise consuming to Consuming to Difficult to make make make all decisions decisions. decisions Conflict Conflict alone Fear No one to take over when on leave. Capital-Size of the business Capital refers to the amount of money needed / used for the establishment of a working business. The bigger the business, the more capital required. The nature of the business will also determine capital requirements. Source of Capital: Loans Own Capital  FOO Capital Application Contribut ion Only one person Capital Sole Only ONE contributes capital making it difficult to requiremen Trader owner expand and grow the ts and Form business. of More people Ownership Partnersh 2-unlimited contribute capital thus making it easier ip PARTNERS than a sole trader to expand or grow the business. Profit Company: 1 - as many shares Larger amount of available. capital as more Non Profit access by increasing Company: 3 – no. of shares sold. as many Companies are also Compani shares able to borrow es available. money in their own Private name. Company: 1 Risky: Too much to unlimited capital and shares  Form of Formation Application: Ownersh Procedure ip No long term planning and preparation No official required. No costs Sole Trader formation involved, easy and Formation Procedure uncomplicated to start. and Form Not registered so no legal protection of No long term planning and Ownership No official formation preparation required. No costs procedure, involved, easy and Partnership however uncomplicated to partnership start. agreement Not registered so advisable no legal protection. Notice to Enjoy legal Incorporate and protection. Memorandum of Lengthy process Companies incorporation and more lodged at the expensive than Sole Trader Business is owned by one person who contributes all the capital to the business. Usually started when the owner has a special skill that can be used to generate an income. A sole trader is not a separate legal entity as it is not registered. Contracts entered into are the responsibility of the owner and not the business. Owner takes full responsibility for the debts of the business – unlimited liability The business does not have continuity – if the owner dies or retires the business no longer exists. The owner pays the tax on the profits of the business up to a maximum of 45%. Partnership Written, verbal or tacit agreement between at least two but no more than twenty people to combine their money and skills in a business. The business is not a legal entity as it is not registered. Profits and losses are shared amongst the partners according to the contribution they made. Relationship between partners – utmost good faith. Partners bind co-partners – responsible for each others actions. Partners have unlimited liability for the debts of the business. Partners share the responsibilities of the business. Each partner pays tax in their own personal capacity – maximum of 45% Continuity is dependant on lifespan of the partners. Types of Companies Profit State owned Companies Compani Private Companies Personal Liability es Companies Public Companies Non- Profit Compani es  A company must reserve a name for the business, it may not be the same or too similar to another business. The name may not be undesirable or offensive to any group of society. The name may not be associated with Names of anybody e.g. the South African Government and may not be Companie misleading. s PRIVATE COMPANIES – Pty (Ltd) PUBLIC COMPANIES – Ltd STATE OWNED COMPANIES – SOC Ltd.  Companies need to be registered, in order to do so a fee is required. Document to register a company – Memorandum of Incorporation Memorandum of Incorporation: Is the founding statement to start a company Stipulates the different types of shares Formation that will be sold and the responsibilities associated. Procedure Describes duties and responsibilities of directors Shows compliance with the Companies Act Companies require a minimum of ONE shareholder, however public companies require a minimum of three directors and a private company one. Formation Procedures The formation procedure refers to the different processes they must follow and regulations they must comply with in order to be a registered business. The more formal the business – companies, the longer and more expensive the formation process. The Prospectus A written invitation to the public to buy shares in the company. A private company may NOT sell shares to the public so may NOT issue a prospectus. A prospectus has to be registered and signed and dated by all directors. The prospectus must include general information about the business and financial information for at least three years. The prospectus must apply with the King Code – Corporate Governance. Prospectus is issued when the business needs to raise capital for growth or expansion purposes. Duties of Directors Fiduciary duty to act in the best interests of the company and may not act in a manner that will benefit themselves and disadvantage the business. Act in good faith – display skill and diligence. Disclose personal interests to avoid a conflict of interest. Financial Obligations of Public Companies Prepare annual financial statements (AFS) that meet legal requirements. Annual financial statements need to be regularly audited. A company secretary must be appointed. Internal and external audit committees must be appointed. Conduct solvency and liquidity tests before issuing dividends to shareholders.