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Forms of ownership
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Contents
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• 1 Sole Proprietorship
o 1.1 Characteristics
o 1.2 Advantages
o 1.3 Disadvantages
o 1.4 Income Tax
• 2 Partnership
o 2.1 Reasons for the formation of a Partnership
o 2.2 Types of Partnerships
2.2.1 The Anonymous Partner
2.2.2 Partner en Commandite
2.2.3 Limited Partner
o 2.3 Rights and Duties of Partners
o 2.4 Formation
o 2.5 Contents of the Partnership Agreement
o 2.6 Characteristics
o 2.7 Reasons why a partnership may be dissolved
o 2.8 Advantages
o 2.9 Disadvantages
o 2.10 Income Tax
• 3 Close Corporation
o 3.1 Characteristics
o 3.2 Advantages
o 3.3 Disadvantages
o 3.4 Contents of the Founding Statement
• 4 Private Company
o 4.1 Characteristics
o 4.2 Advantages
o 4.3 Disadvantages
o 4.4 Contents of the Memorandum of Association
o 4.5 Contents of the Articles of Association
• 5 Public Company
o 5.1 Characteristics
o 5.2 Advantages
o 5.3 Disadvantages
o 5.4 Contents of the prospectus
• 6 Amalgamation
Sole Proprietorship
Characteristics
Disadvantages
• The owner has unlimited liability because his/her personal assets may be sold in order to
pay for the debts of the business.
• There is no continuity.
• Because there are a limited number of assets to give as security, it is difficult to obtain a
loan.
• It is not easy to acquire good, qualified staff, as there is little to offer them in the way of
promotion.
• Salaries paid to workers are normally lower than the salaries that bigger companies can
offer.
• The owner is usually responsible for all managerial functions, often without the necessary
expertise and experience.
• Competition is usually strong.
• Prices offered to consumers by sole traders are usually far higher than those of the other
forms of ownership, and consumers generally buy where it is cheapest to do so.
• There is usually a limited amount of capital with which to expand the business.
• The owner is the only person with direct interest in the business. His/her decisions
depend solely on his/her judgement. Wrong decisions are often made.
• If the owner is not wholly dedicated to business, he/she will suffer the effects directly.
Income Tax
The sole proprietorship does not pay tax per se, because the one-man business is not a legal
personality. The sole proprietor himself, however, does pay income tax in his private capacity.
Partnership
A partnership is an agreement between two to twenty (limited by law) persons to contribute
money, labour and skill to a business and to run it for the benefit of all, dividing profits or losses
in agreed proportions.
• In the case of a sole proprietorship or close corporation, the owner/s may want to increase
the business's capital for the purposes of expansion.
• Two or more people may want to combine their skills, personal qualities and
administrational abilities with a view to greater efficiency.
• The owner/s may want to retain the services of a competent employee by giving him/her
a stake in the business.
• The amalgamation of competing firms helps to eliminate harmful competition.
• Family interest in a business can be ensured by employing a younger relative or child.
• Sharing the burdens and responsibilities amongst partners helps to ease the stress on the
individual.
Types of Partnerships
• General partners
• Special partners
The general partnership is the most common type, and members are known simply as partners.
They all take an active part in the management of the partnership and are jointly and severally
liable for the debts of the enterprise.
This type of partner contributes only to the capital of the business and is not known strictly as a
business partner. Uninvolved in the management of the partnership, they are known also as
sleeping partners.
Partner en Commandite
This is a commandite partner, whose liability to the debts of the business is limited. They are not
really known as partners either, for they do not play an active role in the management of the
business.
Limited Partner
The liability of this type of partner is limited: it does not play any role in the management of the
partnership.
Rights and Duties of Partners
• Each partner becomes an agent of the partnership. It follows, therefore, that each partner
has the authority to execute all sorts of acts incidental to the proper conduct of the
business and, as such, bind their fellow partners to their actions.
• A partnership is a contract of utmost good faith. Partners should be sincere and honest in
their dealings with clients and co-partners.
• The partners are both jointly liable, as well as liable severally for the debts of the
business settled by themselves individually.
• The relationship between partners is one of mutual trust and confidence. Consequently, a
partner may acquire and retain for him/herself any benefit or advantage which falls
within the scope of the partnership. If a partner commits a criminal act in furtherance of
the interest of the partnership, each member of the partnership is deemed to be guilty of
the offence unless it is proven that they did not take part in and could not have prevented
the offence.
• Each partner is entitled to full information regarding the affairs of the partnership. He/she
and his/her adviser must have free access to the books and accounts.
Formation
Except in the case of a limited partnership, any partnership may be formed by an oral or written
agreement. It is, nevertheless, advisable to get the help of an attorney in drawing up a written
contract, known as the partnership articles. Each partner should sign the partnership articles,
thereby binding themselves to its stipulations. If a written contract does not exist, disputes are
settled in terms of the principles of the common law.
Advantages
Disadvantages
• Ordinary partners are jointly, severally and unlimitedly liable for the debts of the
partnership.
• It has no continuity -- vis-à-vis it must dissolve when a partner dies, retires or is declared
insolvent, or when a new partner enters the business.
• Capital cannot be contributed by more than twenty members.
• A difference of opinions may delay the decision-making process, for all partners must be
included in decision-making.
• Urgent decisions, therefore, are not easily taken.
• Because financial statements are not audited, fraud can occur.
• Each partner acts as an agent of the partnership. When one partner signs a contract on
behalf of the business, the other partners are bound to it, irrespective of their objections.
Income Tax
The same principles which apply to sole proprietorships apply also to partnerships. Although the
partnership itself does not pay income tax, its members do.
Close Corporation
Characteristics
Advantages
Disadvantages
Private Company
Characteristics
Advantages
• Limited liability.
• Not subject to legal requirements of a public company.
• No minimum subscription required.
• Ideal for a business requiring privacy.
• Relatively easy to raise sufficient capital (via shares).
• Suitable for entrepreneurs with limited capital but inventive ideas.
Disadvantages
• Name Clause.
• Objectives Clause.
• Limited Liability Clause.
• Share Capital Clause.
Public Company
Characteristics
Disadvantages
• Directors not always able to manage companies as effectively as sole traders and
partners.
• Formation expenses are high.
• Tax burden is greater than in other forms of ownership.
• Administrative costs are high.
• Management separate from ownership.
• Financial statements are available to competitors.
• Procedure of establishment is complicated.
• The failure of a public company affects thousands.
• Memorandum not easily altered.
• Numerous legal formalities.
• Often conducive to monopolies.
Amalgamation
• Horizontal amalgamation occurs when two companies in the same industry merge.
• Vertical amalgamation occurs when two companies in different industries merge.
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