Study Unit 5 -EB121

• Forms of business enterprise


  The legally recognised form through which and in whose name the business will operate
• Laws regulate the establishment and operations of businesses
• Laws determine the legal structure under which all businesses operate
• Examples of forms of business enterprise

  • Sole proprietorship
  • Partnership
  • Close corporation
  • Private company
  • Public company
  • State-owned enterprise
• Distinguishing factors influencing the choice of business enterprise

  • Nature and extent of activities
  • Legal personality
  • Liability of owners
  • Profit sharing
  • Income tax
  • Management participation
  • Legal requirements and costs
  • Potential to raise capital
  • Perpetual Succession
• Legal personality


  A business operates as a separate legal entity e.g has its own assets and can incur liabilities
• Perpetual succession


  The ease with which an owner can transfer an interest in an enterprise to another party e.g a business can still continue if the owner dies or owner can sell their interest
• Unlimited liability


  Owners can be personally liable and accountable for the debts of the business i.e personal assets can be attached to pay debt
• Limited liability


  Owners protected and not personally liable unless they act illegally
• Sole proprietorship


  • Conducts business in personal capacity (no legal personality)
  • Life of business dependent on life of owner
  • Ownership transferable with consent of owner
  • Liability is unlimited
  • Ability to raise capital is limited
  • Manages enterprise alone (makes all decisions)
  • Skills can be employed
  • All profits belong to sole proprietor
  • Pays tax on profits of business in personal capacity
• No specific legal requirements apply to sole proprietorships
• Sole proprietorships simply commence trading under own name, or trading name (registered)
• Sole proprietorships do not require an accountant or accounting officer
• Sole proprietorships' financial statements need not be audited
• Advantages and disadvantages of sole proprietorships


  • See Table 6.1 p145
• Partnership


  • A contract between at least two people and no more than 20 people
  • The persons concerned agree to contribute money, labour or skill
  • To carry a business with the objective of making a profit for their joint benefit
• Types of partnerships


  • Ordinary partnerships (all partners active in management, decisions made by one bind the other, partners are jointly and severally liable)
  • Extraordinary partnerships (anonymous partnerships, commanditarian partnerships - partners have protection against liability to 3rd parties for debts but share profits beyond capital, do not actively participate in affairs of partnership)
• Attributes of partnerships


  • No specific legal requirements regarding name (Business Names Act)
  • Generally, name made up by names of partners
  • No legal personality
  • Continuity dependent on partners (terminated or dissolved by mutual agreement, insolvency, retirement, death)
  • Unlimited liability - partners are jointly and severally liable for debts
  • All partners active in management (Ordinary partnership; decisions binding)
  • Each partner represents partnership in transactions
  • Profits and losses are shared among partners
• A partnership is established when prospective partners conclude an agreement that meets the general requirements of a valid contract
• The partnership agreement/contract governs the relationship between partners
• No other specific legal requirements for formation of a partnership
• Appointment of an accounting officer/accountant is not required for partnerships
• Partnerships' financial statements need not be audited
• According to the Business Names Act, partnerships must have a name and place of business, and the names and nationalities of partners not SA citizens, appearing on all documents issued
• Close corporation (CC)


  • A simple, flexible and inexpensive form of business enterprise for a single entrepreneur or up to 10 natural persons engaged in business
  • CCs are legal entities with capacity/powers similar to companies
  • No longer an avenue for the incorporation of new entities, but existing CCs may continue
  • Possible to purchase a shelf CC or buy an existing CC
• Attributes of close corporations

  • 1 owner or up to a maximum of 10 members
  • Members make a contribution to CC (money, assets or services rendered)
  • Members have an interest in CC (% adds up to 100%)
  • No share capital but interest
  • Ability to raise capital restricted to members
  • Members participate in management of CC (equal rights to manage/represent)
  • Membership limited to 'natural persons' (no companies)
  • CCs may be members of a partnership or company
  • Name must have letters 'CC' at the end of title
  • Separate legal personality (juristic/ legal person)
  • Limited liability
  • Continues to exist (perpetual succession), even if membership changes
  • Income of CC belongs to CC- not its members
  • CCs taxed at company tax rate
  • If qualify as Small Business Corporation - pay tax accordingly
  • Profits after tax may be distributed among members (shared according interest)
  • Profits paid - subject to Dividends Tax in hands of members
• Company


  • A juristic person incorporated in terms of the Companies Act 71 of 2008
  • An association of persons with common objective of acquiring gain, which in itself is a separate legal person
  • An 'artificial person' with legal status (juristic person)
• Types of companies


  • Profit seeking company (purpose - financial gain for shareholders)
  • Non-profit seeking company (purpose - public/social benefit not profit)
  • Public company (name ends with 'Limited' or 'Ltd', raises capital by selling shares to general public, shares traded on stock exchange, shares are freely transferable, disclosure of information to public is compulsory)
  • Private company (may not sell shares to general public, transferability restricted, raising of share capital limited, name ends with 'Proprietary Limited' or '(Pty) Ltd', measure of disclosure/transparency less than public companies, financial statements need not be published)
  • State-owned enterprise (national government business enterprises, provide goods/services according to ordinary business principles, have legal personality, fully or largely financed by taxes, levies or other statutory money, fall under Public Finance Management Act 1 of 1999, name ends with 'SOC' or 'SOC Ltd')
• South African public companies

  • Impala Platinum Holdings Ltd
  • Tiger Brands Ltd
  • Sasol Petroleum Ltd
• Private company


  • May not sell shares to general public
  • Transferability restricted
  • Raising of share capital limited- 1 to a maximum of 50 shareholders
  • Name ends with 'Proprietary Limited' or '(Pty) Ltd'
  • Measure of disclosure/transparency less than public companies
  • Financial statements need not be published
• Private companies


  • Ford Motor company S.A (Pty)Ltd
  • Altron Finance (Pty)Ltd
• State-owned enterprise

  • National government business enterprises
  • Provide goods/services according to ordinary business principles
  • Have legal personality
  • Fully or largely financed by taxes, levies or other statutory money
  • Fall under Public Finance Management Act 1 of 1999
  • Name ends with 'SOC' or 'SOC Ltd'
• State-owned enterprises


  • Eskom Holdings SOC Ltd
  • OR Tambo Airport SOC Ltd
  • Robben Island Museum SOC Ltd
• Personal liability company


  • Type of private company
  • Used by professionals (attorneys, accountants, doctors and engineers) who wish to benefit from a legal personality
  • Usually directors, together with the company, are jointly and severally liable for all liabilities incurred during their terms of office
  • Indicated in Memorandum of Incorporation that a personal liability company name ends with 'Incorporated' or 'Inc.'
• Non-profit seeking company


  • Main objective: promotion of religion, art, science, education, charity, recreation or any other cultural or social activity or communal interest, or some public benefit
  • Assets and profits made - applied to promoting main objective
  • Members or directors may not benefit financially from company (earn reasonable remuneration for work done)
  • Name must end with 'NPC'
• Non-profit seeking companies


  • Business Against Crime South Africa NPC
  • the Board of Healthcare Funders of Southern Africa NPC
• Companies


  • Allows for raising larger amounts of capital (issue shares to shareholders)
  • Shareholders (members) are owners of company – (can be natural or legal persons)
  • Two types of share capital (nominal/authorised and issued share capital)
  • No minimum capital prescribed
  • Different classes of shares exist (each with specific rights and conditions in terms of profit and risk entitlement)
  • Ordinary and preference shares
• Public company


  • Able to raise more capital than private company
  • General public invited to buy shares via a prospectus
  • Shares in public company freely transferable
  • Share in private company require approval for transfer
  • Legal person (exists independently of shareholders)
  • Has perpetual succession (unless liquidated)
• Companies


  • Limited liability exists (if shares fully paid up and guarantees for loans not provided)
  • Shareholders do not usually participate in the management
  • Daily management is responsibility of a board of directors
  • Executive directors - specifically involved in daily management
  • Private or personal liability companies – at least 1 director
  • Public and non-profit companies - at least 3 directors
  • Shareholders (major) vote in general meetings (proportional to shareholding)
  • Specific formalities prescribed for meetings
• Profits

  • Belong to the company
  • May be distributed by dividend (authorised by board of directors)
  • Distributed to shareholders (according to nature and number of shares)
  • Shareholders are not entitled to dividends
  • Dividends distributed - subjected to Dividends Tax
  • Companies are taxed according to a flat rate
  • If private company meets criteria - qualify as a Small Business Corporation, and pay tax accordingly