head for success business studies – grade 12. term 3 topic 3a: forms of ownership

HEAD FOR SUCCESSBusiness Studies – Grade 12

TERM 3Topic 3a: Forms of Ownership

FORMS OF OWNERSHIP• INTRODUCTION:• The form of ownership refers to the type of business a

business owner wants to register and start.• The different forms of ownership are::• Sole proprietorships• Partnerships• Close Corporations• Companies• Profit Companies (private and public companies)• Non-profit companies• State-owned companies

FORMS OF OWNERSHIP• THE EXTENT TO WHICH A PARTICULAR FORM OF OWNERSHIP

CONTRIBUTES TO THE SUCCESS OR FAILURE OF A BUSINESS:• The form of ownership not only impacts on the success of

the business, it also has an influence on the business’s ability to:• grow• raise capital• enter into contracts• continue to exist when a change in ownership takes

place• apply for government tenders

FORMS OF OWNERSHIP• RECAP:• Forms of ownership refers to the type of business selected

by a business owner.• Different forms of ownership are suitable for different kinds

of businesses.• Factors that determine the form of ownership include:• the amount of capital needed to start the business• size of the business• income of the business• ownership of the business

FORMS OF OWNERSHIP• RECAP:• Knowledge of the following concepts should help you

understand forms of ownership:Natural persons • All human beings.

• Are born.Legal persons • Legal creations, with some characteristics of human

beings, e.g. companies.• Incorporated by registration.

Unlimited liability • If the owner/partner is sued by a creditor, the owner must pay the debts even if the owner does not have enough money.

• This means that the owner’s personal assets may be seized to pay for the debts of the business.

Limited liability • Losses are limited to the amount that the owner invested in the business.


understand forms of ownership:Continuity • Some businesses (CC’s companies and co-

operatives) continue to exist even if a change of ownership takes place, e.g. a member or shareholder dies or retires.

Surety • If a person or business accepts liability for the debt of another person or business.

Incorporators • People who complete and lodge the documents necessary for the registration of a company.


understand forms of ownership:Memorandum of

Incorporation (MoI)• The document that sets out the rights,

responsibilities and duties of shareholders and directors.

• Serves as the constitution of a company.Director • Member of the board of a company.

• Appointed by shareholders.• Manages the company and its affairs.• The board has the authority to exercise all of the

powers of the company and perform any of the functions of the company.


understand forms of ownership:Securities • Shares and bonds of a company

• Traded on securities exchanges, such as the JSESecurities register • A list of all securities of a company.

Company secretary • A person appointed by a company to assist directors in performing their duties, responsibilities and powers.

• Informs the directors of laws affecting the company.• Keeps minutes of shareholders’ meetings and board

meetings.


understand forms of ownership:Corporate

governance • Concerned with the company’s accountability to

shareholders, its ethical duties and its role as a corporate citizen.

• Concerns transparency and accountability, i.e. economic, social and environmental responsibilities.

FORMS OF OWNERSHIP• SOLE PROPRIETORSHIP:• Definition• A sole trader is a business with one owner, which is not

registered as a company.• Could have employees, even though sole proprietorships are

owned and managed by one person.• Suitable for small enterprises.• It is the form of ownership that is the easiest and cheapest to

construct.• Simple to start in the sense that there are not many legal

provisions, rules or regulations that bind the owner in starting the business.

• The owner provides the capital itself or borrows capital for the business.

FORMS OF OWNERSHIP• SOLE PROPRIETORSHIP:

CHARACTERISTICS ADVANTAGES DISADVANTAGES

• Sole proprietorships are owned and managed by a single owner.

• It is simply the owner doing business – there is no distinction between the owner and the business.

• Sole proprietorships are not legal entities.

• Assets belong to the owner.

• Profit belongs to the owner.

• The owner can simply start doing business – there are no registration formalities.

• Owner runs the business as he/she sees fit.

• The owner does not need anyone else’s permission to make a business decision.

• The owner usually has direct contact with consumers.

• The owner is not accountable to other owners.

• Owner contributes only his/her own skills, time and energy to the business.

• Sole proprietorships do not have continuity – this means that the business does not continue to exist if the owner retires or dies.

FORMS OF OWNERSHIP• SOLE PROPRIETORSHIP:


• The owner pays tax in his/her personal capacity.

• The owner is liable for all debts incurred by the business.

• The success of the business belongs to the owner.

• The owner pays tax in his/her personal capacity – personal tax rates for high earners are higher than tax rates for companies.

• Capital is limited to the amount of money the owner has access to.

• The owner has unlimited liability for the debt of the business.

FORMS OF OWNERSHIP• PARTNERSHIPS:• Definition• A partnership is when the owners do business without

registering as a company.• A partnership has at least two members.• The number of partners depends on the nature and size of the

partnership.• There are four essentials to forming a partnership:• Every partner must make a contribution• The business must be carried on for the joint benefit of all partners• The object must be to make a profit• The partnership contract must be legal

FORMS OF OWNERSHIP• PARTNERSHIPS:


• A partnership is an agreement between two or more persons.

• Each partner makes a contribution to the partnership, e.g. skills, time, effort or money.

• Partnerships are not legal entities.

• Partnership can be financially strong because many people can contribute to the capital of a partnership.

• Partners have a personal interest in the business. This encourages partners to work hard.

• Responsibilities, such as paying rent and water and electricity, are shared

• Partners do not always agree – this can delay decision-making.

• A bad decision by one partner can lead to losses for the partnership.

• Partners are bond by the decisions of other partners.

• No continuity – partnerships dissolve when a partner dies or retires.

• Partners have unlimited liability for the debt of the partnership

FORMS OF OWNERSHIP• PARTNERSHIPS:


• Partners are jointly and severally liable for the debts of the partnership – one partner can be held liable for the total debt of a partnership. The partner who pays the debt can then collect each partner’s share of the debt from that partner.

• Profits and losses are shared among partners according to the terms in the partnership agreement.

• Partners pay tax in their personal capacity.

• Stress is reduced because decisions can be made in collaboration with other partners.

• Easy to establish and dissolve.

• Partners can specialise in what they do best.

FORMS OF OWNERSHIP• CLOSE CORPORATIONS:• Definition• A registered business with a membership of 1 – 10 persons.• Exists under the Close Corporations Act (Act 69 of 1984).• Specially created for smaller businesses.• The future of Close Corporations• The new Companies Act (Act no 71 of 2008) does not make provision

for the formation of new Close Corporations, however:• Existing Close Corporations may continue to exist indefinitely, or

until their members decide to convert to companies.• Existing companies may not be converted into Close Corporations• Existing Close Corporations will be treated as private companies.

FORMS OF OWNERSHIP• CLOSE CORPORATIONS:• : CHARACTERISTICS ADVANTAGES DISADVANTAGES

• Owned and managed by 1 – 10 members.

• Name ends with the words Close Corporation or CC.

• Close Corporations have continuity.

• Close corporations are legal entities.

• Assets belong to the CC and not to its members.

• Profit belongs to the CC and not to its members.

• Tax is paid by the CC.

• Members have limited liability for the debts of the CC, unless they have stood surety.

• Suitable for small and medium businesses.

• Usually has access to more capital than sole proprietorships.

• Financial statements do not need to be audited.

• Tax rates for businesses are lower than tax rates for individuals

• Capital is limited to the contribution of up to ten members

• Creditors normally require members to stand surety before lending money to the CC.

• All members of a CC must approve if a member wishes to sell his/her interest.

FORMS OF OWNERSHIP• CLOSE CORPORATIONS:• : CHARACTERISTICS ADVANTAGES DISADVANTAGES

• Members can be required by creditors to stand surety for the debt of the business – this means that debts can be recovered from members in their personal capacity.

• Members may become personally liable for the debts of the CC

• Auditing of financial statements is voluntary, unless required in terms of the Companies Act.

• The financial statements of some CC’s (as determined by the Companies Act) are subject to an independent review and/or audit.

FORMS OF OWNERSHIP• COMPANIES:• Companies are divided into two categories:• Non-profit companies: formed for public benefit

purposes.• Profit companies: formed for the financial benefit of

shareholders (owners)• Private companies• Personal liability companies• Public companies• State owned companies

FORMS OF OWNERSHIP• PRIVATE COMPANY:• Definition• A profit company is a private company if:• its securities may not be offered to the public; and• the transferability of securities is restricted• (Shareholders can sell their shares only to fellow shareholders

if they want to withdraw)

FORMS OF OWNERSHIP• PRIVATE COMPANY:


• Name ends with “Proprietary Limited”, or “(Pty) Ltd”.

• Owned by shareholders.• Minimum number of

shareholders is one.• Managed by directors.• Minimum number of

directors is one.• Securities are not offered to

the public

• More capital can be raised by a company than by an individual.

• Creditors are less likely to require surety from members it the company is financially strong.

• Continuity of existence.• Auditing of financial

statements is voluntary, unless required in terms of the Companies Act.

• Not necessary to appoint an auditor, audit committee or company secretary

• Double taxation: companies pay tax on taxable income of the company, as well as dividend tax on the dividends distributed to shareholders.

• Restricted from raising funds directly from the public.

• Costs and formalities associated with forming a private company.

FORMS OF OWNERSHIP• PRIVATE COMPANY :

CHARACTERISTICS ADVANTAGES DISADVANTAGES• If a shareholder wishes to sell

his/her shares, the shares are to be offered to existing shareholders first.

• A securities register must be kept.

• Shareholders have limited liability for the debts of the company.

• Not necessary to hold annual general meetings.

• The financial statements of some companies (as determined b the Companies Act) are subject to an independent review and/or audit.

FORMS OF OWNERSHIP• PUBLIC COMPANIES:• Definition• A public company is a profit company that is allowed to

offer its securities to the public.• A company where the capital is raised by selling shares to

the public.• These shares may be traded through the Johannesburg

Securities Exchange Limited (JSE) if the company is listed with the JSE.

FORMS OF OWNERSHIP• PUBLIC COMPANIES :


• Owned by shareholders.• Minimum number of

shareholders is one.• Managed by directors.• Minimum number of

directors is three.• Names of public

companies end with “Limited” or “Ltd”.

• Securities may be offered to the public.

• A securities register is kept.

• Shareholders have limited liability for the debt of the company.

• Funds may be raised directly from the public by offering securities to the public.

• Continuity of existence.• Companies can raise

more capital than other forms of business enterprises.

• Double taxation: companies pay tax on taxable income of the company, as well as dividend tax on the dividends distributed to shareholders.

• Poor performance by a public company can lead to management losing their jobs.

• Annual general meetings must be held, placing and administrative burden on the company.

FORMS OF OWNERSHIP• PUBLIC COMPANIES :


• The price of the securities serves as a barometer of the company’s performance.

• Incorporating a public company is a complicated process.

• An auditor, audit committee and company secretary must be appointed.

• Public companies have extensive corporate governance duties.

FORMS OF OWNERSHIP• NON-PROFIT COMPANIES:• Definition• Companies that do not exist to make profit.

FORMS OF OWNERSHIP• NON-PROFIT COMPANIES:


• The main goal of non-profit companies is for public benefit purposes.

• All income and assets non-profit companies are used for public benefit purposes.

• Members, directors and incorporators of non-profit companies may not gain any financial benefit from the company, other than reimbursement for costs incurred on behalf of the company.

• The names of non-profit companies end with NPC.

• A minimum of three directors are appointed.• Financially dependent on support from the

community, sponsorship and fundraising projects

• Aims to benefit the community

• Not sensitive to commercial considerations.

• Difficult to raise money

FORMS OF OWNERSHIP• STATE OWNED COMPANIES:• Definition• A state owned company is a registered company that is

either:• owned by the state; or• is a municipality

FORMS OF OWNERSHIP• STATE OWNED COMPANIES:


• The state is the only shareholder.

• Examples of state owned companies: Eskom, Telkom, SAA and the SABC.

• The board of directors are appointed by the government.

• The remuneration of directors is determined by government.

• Names end with “SOC Ltd”

• State owned businesses can be managed more efficiently when they are managed as state owned companies.

• The format of the state owned company provides a vehicle for holding state owned businesses accountable.

• State owned companies allow for a compromise between the state’s interests and commercial considerations.

• It is difficult to enforce accountability.

• A company secretary has to be appointed, placing a financial burden on the company.

• The state, as an owner, is less sensitive to commercial considerations.

• State owned companies often operate at a financial loss.

FORMS OF OWNERSHIP• PERSONAL LIABILITY COMPANIES:• Definition• A profit company is a personal liability company if:• it meets the criteria for a private company.• its Memorandum of Incorporation states that it is a

personal liability company.

FORMS OF OWNERSHIP• PERSONAL LIABILITY COMPANIES:


• Name ends with the word “Incorporated” or “Inc”.

• Owned b shareholders.

• Minimum number of shareholders is one.

• Managed by directors.• Minimum number of

directors is one.• Securities are not

offered to the public.

• More capital can be raised by a company than by an individual.

• Creditors are less likely to require surety from members if the company is financially strong.

• Continuity of existence.• Auditing of financial

statements is voluntary, unless required in terms of the Companies Act.

• Not necessary to appoint an auditor, audit committee or company secretary.

• Double taxation: companies pay tax on taxable income of the company, as well as secondary tax on the dividends distributed to shareholders.

• Restricted from raising funds directly from the pubic.

• Costs and formalities associated with forming a personal liability company.

FORMS OF OWNERSHIP• PERSONAL LIABILITY COMPANIES:


• If a shareholder wishes to sell his/her shares, shares are to be offered to existing shareholders first.

• The directors of public liability companies are jointly and severally liable for the debts of the company.

• People in professions such as attorneys and doctors, often prefer to incorporate as personal liability companies rather that doing business as partnerships.

• Not necessary to hold annual general meetings.

• The financial statements of some companies (as determined by the Companies Act) are subject to an independent review and/or audit.

FORMS OF OWNERSHIP• COOPERATIVES:• Definition• A co-operative is an:• autonomous association of persons• who are united voluntarily• to meet their common economic and social needs• through a jointly owned and democratically controlled

enterprise• that is organised and operated by co-operative principles.

FORMS OF OWNERSHIP• COOPERATIVES:


• Not driven by profit.• Reason for existence is

usually service delivery.

• Name includes the word “co-operation” or “co-op” and ends with the word “Limited” or “Ltd”.

• Controlled by the members of the co-op.

• Members have equal voting rights – one member, one vote.

• Creates an opportunity for people to word together towards a common goal.

• Aims to benefit the community.

• Bulk buying often enables co-operatives to negotiate good prices with suppliers.

• Co-operatives do not aim to make profit so they are usually capable of selling goods at affordable prices.

• Not as sensitive to commercial considerations as a company.

• Not as effective at raising capital as a company.

• The main aim of a co-operative is not to make profit. This means that co-operatives can easily get into financial trouble.

• Difficult to dispose of shares.

• Subject to annual audits.

FORMS OF OWNERSHIP• COOPERATIVES:


• Co-operatives specialise in particular fields, e.g. agricultural co-operatives and consumer co-operatives.

• Returns are paid out to members.

• Co-operatives must establish a reserve fund – at least 5 % of the surplus must be kept as a reserve and may not be distributed to members.

• Compelled to hold annual general meetings - an administrative burden.

FORMS OF OWNERSHIPAlso look at the table in your textbook as a summary !!!

head for success business studies – grade 12. term 3 topic 3a: forms of ownership

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