2) Sole Trader | Partnership | Close corporation

• Characteristics of a sole trader

  • This is the simplest and oldest form of ownership.
  • The business is owned and managed by one person only.
  • Profit is added to the rest of the owner's taxable income.
• Impact of sole traders

  Positives

  • It requires little capital to start.
  • It is easy to start or end the business.
  • There are only a few legal formalities.
• Impact of sole traders

  Negatives

  • The owner is responsible for providing all the capital needed.
  • The business is not a legal entity and has no continuity.
  • The owner is personally liable for all the debts and losses of the business.
• Criteria that contribute to the success and/ or failure of a sole trader

  Taxation

  Success

  • The owner is only taxed on profits in a personal capacity.
  • The owner's income is taxed at a lower rate than the company tax rate.

  Failure

  • If profits get too large, the owners may end up paying a bigger amount of tax in his/ her personal capacity.
• Criteria that contribute to the success and/ or failure of a sole trader

  Management

  Success

  • One owner can make quick decisions because he/ she does not have to consult others and there are no conflict.

  Failure

  • The owner has to do all the administration, management and decision-making in the business.
• Criteria that contribute to the success and/ or failure of a sole trader

  Capital

  Success

  • Capital will be carefully spent and managed because owners contribute all capital.

  Failure

  • Profits may not be large enough for expansion.
  • The owner is responsible for any capital borrowed.
• Criteria that contribute to the success and/ or failure of a sole trader

  Division of profits

  Success

  • The owner receives all profits from the business which can lead to capital growth.

  Failure

  • Profits may not cover all business debts, which might hinder the expansion of the business.
• Criteria that contribute to the success and/ or failure of a sole trader

  Legislation

  Success

  • It is easy/ inexpensive to start
  • There are limited regulatory requirements regarding the name of the business.

  Failure

  • The owner is personally liable for the loss of the business and must budget carefully.
  • Personal debts and business debts are one.
• Characteristics of a partnership

  • Profit is shared according to the partnership agreement.
  • It is optional to audit the financial statements of a partnership.
  • There are no legal requirements regarding the name of the business.
• Impact of partnership

  Positives

  • The partners have a personal interest in the business.
  • There are a few legal requirements to establish a partnership.
  • Partnerships are not compelled by law to do audits.
• Impact of partnership

  Negatives

  • There can be a lack of capital and cash flow.
  • Partners might not all contribute money and assets equally.
  • Partners have unlimited liability which means they can lose personal assets.
• Criteria that contribute to the success and/ or failure of a partnership

  Taxation

  Success

  • The partnership does not pay income tax, only the partners in their personal capacities.

  Failure

  • High-earning partners pay more tax, which may discourage other partners from join the partnership.
• Criteria that contribute to the success and/ or failure of a partnership

  Management

  Success

  • Partners are actively involved in the management and may use the ideas of other partners.
  • Not all partners need to be actively involved in the management and could appoint competent managers.

  Failure

  • Decision-making can be time-consuming as all partners have to agree.
  • Irresponsible acts of one partner can place the entire partnership at risk.
• Criteria that contribute to the success and/ or failure of a partnership

  Capital

  Success

  • More capital can be obtained because more than one partner contributes to capital.

  Failure

  • Unequal inputs as some partners put in expertise instead of cash.
• Criteria that contribute to the success and/ or failure of a partnership

  Division of profits

  Success

  • Partners share profits according to their contributes which will encourage hard work and commitment from them.

  Failure

  • The amount of work done may not be equal to the amount of profit that each partner receives which could lead to dissatisfaction.
• Criteria that contribute to the success and/ or failure of a partnership

  Legislation

  Success

  • Easy and cheap to establish, as partners must draw up a partnership agreement.
  • No regulatory requirements regarding the name of the business.

  Failure

  • If one partner dies or retires, the remaining partners need to draw up a new agreement.
  • A partnership is not a legal entity, partners can sue or be sued.
• Characteristics of a close corporation

  • A CC pays tax on income earned by the business.
  • The name of the business must end with the suffix CC.
  • Profits are shared in proportion to the member's interest in the CC.
• Impact of close corporations

  Positives

  • A CC is a legal entity and has continuity of existence.
  • The members of the CC have limited liability.
  • There are very few legal requirements like auditing or regular annual general meetings.
• Impact of close corporations

  Negatives

  • A CC is taxed the same rate as companies and it is higher than personal income tax.
  • Disagreement between members can lead to conflict and delay decisions.
  • A CC has limited growth and expansion because a CC cannot have more than ten members.
• Criteria that contribute to the success and/ or failure of a close corporation

  Taxation

  Success

  • The CC pays income tax on the profit.
  • Profit is distributed to members and they pay personal tax on that.

  Failure

  • CC pays tax at the same rate ad companies, which is higher than the rate for a partnership.
• Criteria that contribute to the success and/ or failure of a close corporation

  Management

  Success

  • Members put their skills and expertise together to manage the CC.

  Failure

  • Members can disagree and may have conflict, which will delay decisions.
• Criteria that contribute to the success and/ or failure of a close corporation

  Capital

  Success

  • Members are responsible for the success and they will be careful with spending and management of capital.

  Failure

  • If one members leave the CC his/ her capital must be paid out.
• Criteria that contribute to the success and/ or failure of a close corporation

  Division of profits

  Success

  • Members will work harder to earn more profit.

  Failure

  • During difficult economic times, profit will decrease and result in loss of faith in the CC by the members.
• Criteria that contribute to the success and/ or failure of a close corporation

  Legislation

  Success

  • New CCs can no longer be formed, however existing CCs can continue operating for ten years.

  Failure

  • An accounting officer must be appointed and it can be expensive.