Business chapter 3

• Business format


  • The purpose of the business
  • Legal obligations
  • Liability and accountability
  • Management participation
  • Capital
  • Continuity
  • Dividends and profit sharing
  • Taxation
• Types of business formats

  • Sole proprietors
  • Partnership
  • Closed corporations
  • Companies
  • Trust
  • Social co-operatives
• Sole proprietors


  • They are the most simple, easiest and affordable business formats available to aspiring entrepreneurs
  • They have small business owners as they don't have large capital investment
  • It is owned and managed by one person who take all the responsibility and accountability for the business
  • The owner must apply for trading licence from the local authorities and must also register the trading name
  • It is not regarded as a legal person, When the owner dies the business cannot continue but it can continue when the owner agrees to a transfer of ownership and that can be included in the owners will
  • Having separate financial records for the business and personal matters will help the owner to expand the business using profit
  • It can be a challenge for sole proprietors to obtain financial from major banks as they consider the business owners personal banking profile before lending the money
• Advantages of sole proprietors

  • It is easy to establish and set up
  • It is affordable
  • The owner has authority and make all decisions
  • Legal obligations are free
  • Discontinuing the business is easy
• Disadvantages of sole proprietors

  • The owner is liable for everything and theres no limitation
  • Limited skills and capabilities required
  • Access to capital is limited
  • The is no business continuity
• Partnership


  • It is a contractual or verbal agreement between two or more parties in which resources are shared to establish a new profit for the business within the legal framework of the Companies Act 71 of 2008 of the Republic of South Africa
  • The number of partnerships was 20 partners, They can be natural persons and legal persons such as companies, closed corporations, and social co-operatives
  • The advantage of having an unlimited number of partners is the increase in diversification that can take place within the partnership as more capital, knowledge, competencies, and resources are made available as more partners join the partnership
  • The key characteristic of a partnership is that each partner contributes something to the partnership whether it is capital, knowledge, equipment, assets, human resources, or ideas
  • The contributions can be used to determine the percentage of ownership of each partner within the partnership
  • The partnership has to sign a contractual agreement to prevent any potential problems that might occur in the future when the partnership ends or expands and share percentages have to be reallocated according to the individual contributions
  • A partnership Is jointly managed and therefore each partner each partner usually takes on a leadership or managerial role
  • The partnership must adhere to two key juristic aspect: The participation on one hand institutes legal action against an external party, then it may do so in the name of the partnership, not all partner's names have to be listed; If there are insufficient assets in the partnership the creditor can calm against the partnership has been instituted and the estate of the partnership is unable to pay the creditors
  • Partnerships do not have continuity, the only way in which a partnership can remain in operation is if a new partnership agreement is signed between the remaining partners to continue jointly managing the partnership
  • The partnership are held accountable and are responsible for declaring all income generated through the partnership of South African Revenue Service
• Advantages of partnerships


  • It is easy to establish and set up
  • There are assets to more resources and competencies through all partners
  • Legal and natural partners can be partners
  • Capital is easily accessible through the partners
  • Legal requirements and regulations are limited
• Disadvantages of partnerships


  • Each partner is individually liable for the partnership
  • It is easily disposable
  • Conflict among partners in terms of management is high
  • There is no guaranteed continuity of the partnership
• Closed corporations


  • Closed corporations can no longer be established in South Africa
  • The government's intention is to make companies, as a form of ownership, more attractive by simplifying the registration process that applies to companies so that more entrepreneurs will choose to set up companies
  • If a closed corporation decides to remain a closed corporation, stricter regulations and more administrative duties are applied
  • The criteria for names have to be applied and followed
  • Accounting officers must be appointed which in the past is not required
  • The business rescue procedure can be used if required
  • Audited financial statements are required every six months
  • When a closed corporation was established a name reservation and founding statement had to be submitted to the registrar of companies and closed corporations
  • A closed corporation was a legal person having its own individual rights, assets, and liabilities and this allowed it to have continuity
  • There is a maximum of 10 members in a closed corporation and all these members have to be natural persons
  • The personal liability of each member was limited, in that if a member was found guilty of any irresponsible or fraudulent activities that negativity impacted on the closed corporation
  • The word closed implies that the was a certain relationship between the members who managed the closed corporation and that outsiders were not able to enter the closed corporation
  • Sourcing the start-up capital was challenging as only the member of the closed corporation could provide capital or funds to establish the closed corporation by taking out personal loans to obtain funding
  • When establishing a closed corporation all members were required to make a contribution of monetary value which could be profits received at the same rate as companies
  • After the tax deduction the profit were shared among the members in terms of the established agreement in which no furthertaxes were applied to the dividends paid to the members
  • Members of the closed corporation could transfer their shares of closed the closed corporation to new members or other members
• Advantages of closed corporations

  • Limited liability for members
  • Managing the closed corporation is easy
  • Continuity of the closed corporation
• Disadvantages of closed corporations

  • Membership is limited to a maximum of 10 members
  • Member cannot be juristic person
  • Closed corporation can no longer be established
• Companies


  • Companies that can be registered are for-profit companies and non-profit companies
  • Profit companies are established with the main goal of increasing revenue on an annual basis to pay out dividends to shareholders
• Types of for-profit companies


  • State-owned companies
  • Personal liability companies
  • Private companies
  • Public companies
• State-owned companies


  • These companies are all registered in accordance with the Public Finance Management Act I of 1999
  • The accounting officers are responsible for ensuring that the company adheres to ethical and responsible organizational behaviour and that corporate governance principles are implemented throughout the organization
  • The companies that are listed on the Johannesburg Stock Exchange are required to appoint company secretaries and audit to committees to oversee them
• Personal liability companies


  • Personal liability companies are mostly established by individuals in professional occupations
  • This type of company focus on making a profit
  • A personal liability company must have at least one director and the memorandum of incorporation should state that the owner are directly liable for any outstanding debts or liabilities of the company
  • This business format follows the private company model but is managed like a partnership as the share holders or directors are all personally liable for the debts of the company
  • This type of company is often used by professional occupations such as attorneys, doctors, or auditors
• Private companies


  • The name of the private company must end with PTY (Proprietary Limited)
  • Such companies are non-listed companies and are mostly small, micro, or medium-sized companies
  • They can have more than 50 shareholders with at least one director
  • Private companies have fewer regulatory requirements but remain transparent and disclose relevant company information as and when required
  • Private companies cannot make shares available to the public as transferability of shares among shareholders is restricted
  • The shareholder wanting to sell shares must present an acceptable candidate to the board of directors who will take over the shares
  • If a private company wants to expand its business and establish new projects that will support growth and revenue income, the shareholders are responsible for sourcing the capital required to fund new projects
  • The private company is regarded as a legal person, which means the company has its own rights, assets and liabilities
• Public companies


  • A Public company or Private company is for profit company
  • Public companies have the advantage of making shares available to the public to raise capital for investment purposes
  • Which helps the company to expand its business offerings and footprint while also increasing revenue and higher dividends for shareholders
  • The name of any Public company must end with the word Limited (LTD)
  • There must be a minimum of three directors one of whom has to be a accounting officer
  • The accounting officer takes full responsibility and accountability for the company and report to the board of directors and shareholders regularly
  • The Public company must appoint an adult committee and an ethics committee as part of the establishment required
  • Public companies are legal persons who have their own right, assets and liabilities
  • If the company will not be able to pay its debts, the personal debts of the directors or shareholders cannot be accessed, but the company can be placed under liquidation or business rescue in order to salvage what is still available
• Advantages of companies


  • Both natural and legal persons can be shareholder
  • There is a separation between ownership and control
  • Continuity of the company
  • Shares can be transferred among shareholders
• Disadvantages of companies


  • Significant legal requirements must be complied with
  • Operational costs of companies can be high
• Trust


  • Trust is registered when a trust deed is signed
  • Trust can be established only when it has been approved by the Master of High Court, who has the jurisdiction to establish trust
  • Trust are non-legal entities, with the trustee taking full accountability and responsibilities for the trust assets
  • Trust can be set up either in a form of written contract or a valid statement
  • The taxing of a trust can be done in the trustee managing the assets is tex in his or her official capacity or trust obtaining profit are taxed in their personal capacity
• Advantages of trusts


  • Easy to establish
  • Limited liability
• Disadvantages of trusts


  • Limited assets to capital flexibility
  • Conflict between parties is possible
  • Limited continuity
• Social co-operatives

  • The form of ownership is mostly found in local communities, and always members to benefit from the economic, cultural, and social aspects of the community
  • The cooperative is managed by a board of directors that makes decisions that are accepted at annual meetings
  • These annual meetings are used to discuss the operations and performance of the co-operative
• Trust


  Non-legal entity, with the trustee taking full accountability and responsibilities for the trust assets
• Establishing trust


  1. Approved by the Master of High Court

  2. Trustee taking full accountability and responsibilities for the trust assets
• Trust


  Can be set up either in a form of written contract or a valid statement
• Taxing of a trust


  Trustee managing the assets is taxed in their official capacity or trust obtaining profit are taxed in their personal capacity
• Advantages of trust


  • Easy to establish
  • Flexibility
  • Continuity
  • Limited liability
• Disadvantages of trust


  • Limited assets to capital
  • Conflict between parties is possible
• Social co-operatives


  Form of ownership mostly found in local communities, allowing members to benefit from the economic, cultural, and social aspects of the community
• Management of social co-operatives

  1. Managed by a board of directors

  2. Decisions accepted at annual meetings

  3. Members participate in strategic vision and focus

  4. Members vote on board when required
• Purpose of social co-operatives

  • Assist farmers with selling their products
  • Focus on making a profit (surplus)
  • Surplus divided among members based on business conducted
• Categories of co-operatives in South Africa

  • Primary co-operative
  • Secondary co-operative
  • Tertiary co-operative
• Primary co-operative


  Requires minimum of natural persons to be registered, suppliers of basic services and products to members, and employment to the community
• Secondary co-operative


  Established by two or more primary co-operatives, focuses on supporting and making available more sectorial services to its members (which could be a legal person)
• Tertiary co-operative


  Formed by two or more secondary co-operatives, acts as an advocate for matters within the industry and engages with national government, private organizations and industry stakeholders on behalf of its members
• Advantages of co-operatives


  • Legal person
  • Limited liabilities
  • Both natural and legal persons can be part
  • Access to more affordable services and products
• Disadvantages of co-operatives


  • Tension can rise among members when making decisions
  • Lack of business managerial skills to drive and direct the corporate
  • Conflict of interest can take place when a member is a manager, client and a beneficiary
• Business location


  The facility or place in which the business plans to produce or provide services that can be sold to the market
• Factors influencing business location

  • Access to customers
  • Raw material
  • Infrastructure
  • Technical and operational support
  • Labour
  • Weather conditions
  • Political stability
  • Community
  • Capital
  • Local government by-laws
  • Business management