Chapter 14

Forms of
Ownership
Introduction:
Forms of ownership refer to the type of business a business owner wants to register and start.
Various factors need to be considered before deciding on the form of ownership as they may have an
impact on the success or failure of a business.

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Overview
TOPIC CONTENT CONTENT DETAILS FOR TEACHING,
LEARNING AND ASSESSMENT PURPOSES
14. • Characteristics of various of forms of
Forms of ownership • Evaluate the contribution of the
Ownership • Advantages and disadvantages of forms of ownership to the
• Contribution of the forms of ownership success/failure of the business in
to the success/failure of the business terms of the following criteria:
in terms of the following criteria:
Capacity Capacity: Refers to the ability/potential
Tax implications. of management to start and operate a
Management: business as planned.
Capital:
Division of profits Tax implications: The tax
Legislation/Legal requirements requirements of each form of
• Impact of the different forms of ownership determine the impact of
ownership on business success/failure taxation on business success/ failure.

Management: Ownership impacts on

management functions which
determine the success/failure of the
business.

Capital: Refers to the ability to obtain

capital from various sources (e.g.
own/borrowed capital). The amount of
capital that can be success/failure.

Division of profits: Refers to how

profit is divided between
owner(s)/shareholders/ investors.

Legislation/Legal requirements for

establishment/starting a business
impact on the establishment costs and
time before a business can legally do
business.

• Evaluate the impact

(positives/advantages and/or
negatives/disadvantages) of the
different forms of ownership on
business success/failure.

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14.1 Key concepts

These definitions will help you understand the meaning of key Business Studies concepts that are
used in this chapter
Term Definition
Form of ownership The legal position of the business and the way it is owned.
Continuity 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.

Securities Shares and bonds issued by a company.

Limited liability Loses are limited to the amount that the owner invested in the business.
Unlimited liability The owner’s personal assets may be seized to pay for the debts of the business.

Memorandum of The document that sets out the rights, responsibilities and duties of shareholders and
Incorporation (MOI) directors.(serves as a constitution of a company).
Sole Trader /Sole A business is owned and controlled by one person who takes all the decisions,
proprietor responsibility and profits from the business they run.
Partnership An agreement between two or more parties that have agreed to finance and work
together in the pursuit of common business goals.
Co-operative society Autonomous association of persons united voluntarily to meet their common
economic/ social needs/aspirations through a jointly owned and democratically
controlled enterprise.
Company A company is a legal person who has capacity and powers to act on its own.

Profit Companies A company incorporated for the purpose of financial gain for its shareholders.

Non-profit company A non-profit company is an association incorporated not for gain.

Public company A public company is a voluntary association of ONE or more persons,

governed by the company Act 71 of 2008, incorporated in terms of the
Memorandum of Incorporation.
Private company A private company is a voluntary association of 1 or more persons.

Personal liability A personal liability company is a voluntary association of 1 or more person.

company
State-Owned A state-owned company (SOC) is a legal entity that is created by the government
company in order to participate in commercial activities on its behalf.
Partnership A document that contains exhaustive provisions with regards to the matters
Article concerning the business and the partners.
Prospectus Prospectus is a document inviting the public to buy securities/shares.
Annual General A meeting held once a year where the shareholders receive a report stating how
Meeting (AGM) well the company has done.
Directors People elected to the board of a company by the shareholders to represent the
shareholders’ interests.

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14.2 Characteristics, advantages and disadvantages of forms of ownership
Forms of Characteristics Advantages Disadvantages
ownership
Sole proprietor • A sole trader is a • Easy to control since it • Difficult to continue
business that is owned is a small business. and grow long term.
and managed by one • One owner so there is • Owners has to rely on
person. no disagreements. own decisions and
• Can make quick could make incorrect
• A sole trader has limited decisions without ones.
company for expansion
having to consult • If profits get too big
and lacks continuity of
others. may end up paying
existence.
high tax in personal
• Responsible for all the capacity.
financial/ management
decision.
Partnership • There is no limitation on • Partners are actively • Decision making can
numbers of partners. involved in. be time consuming as
• The partnership does not management and may all partners have to be
pay income tax, only the use the ideas of other in agreement.
partners in their personal partners. • Some management
capacities. • Not all partners need tasks may be
• Jointly liable for to be actively involved neglected, as one
legal/financial/ethical in management and partner may leave it to
problems. would rather appoint others to complete.
competent managers. • Partners may disagree
• Easy and expensive to on how to run the
establish/partners business, which may
must draw up lead to tension
partnership between them.
agreement.
Private company • The company name ends • Can obtain tax • Shares are not freely
in (PTY) Ltd. rebates if they are transferable, so less
• Public cannot buy shares involved in SCI capital can be raised.
in a private company projects. • If the company fails to
• Limited liability, jointly • Capital can be attract financially
shareholders and is a increased by getting strong shareholders, it
separate legal entity. more shareholders. may hamper its growth
• The company and its opportunities.
owners • Directors may not
(shareholders) are have a direct interest
separate entities, in the company, which
which may encourage can hamper growth
more people to join and profit
the company. maximisation.
Public company • Requires three or more • The business has its • Large capacity of the
directors and one or more own legal identity. company can also lead
shareholders. • Easy to raise funds to its downfall in that
• The name ends with Ltd. for growth through structure.
• Public can buy shares in the sale of shares. • Large structure can
company. • Can appoint a result in decision
knowledgeable board making taking time.
of directors. become too costly.
• It is easy to buy and • Subject to double
sell shares. taxation e.g.
shareholders pay
secondary tax this can
have a negative
impact to a company
that is already
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financially struggling.

State owned • The company name ends • Profits are distributed • May result to poor
company with SOC. to all sectors. management as
• Profits are distributed to • Profits may be used government is not
all sectors. to finance other state always as efficient as
• Offer essential services departments/reduce the private sector.
which may not be offered taxes. • A lack of incentive for
by the private sector. • Offer essential employees to
• Requires three or more services which may perform if there is no
directors and one or more not be offered by the share in the profit.
shareholders. private sector. • Often rely on
government
subsidies.

• The characteristics, advantages and disadvantages of a

private company are the same as a personal liability
company except the following:
o The directors of a personal liability company are
jointly and severally liable for the debts of the
business.
o The name of a personal liability company ends
with PLC.

ACTIVITY 1

1.1.1 This form of ownership can trade its shares on the Johannesburg Securities Exchange.
A Sparks (Pty) Ltd
B Nalini and Daughters Attorneys
C Kimbelin Diamonds Ltd
D Kia Motors CC

1.1.2 Unlimited liability means …

A Owner’s personal assets are protected in the event that the business becomes insolvent.
B owners stand to lose their personal assets in the event that the business becomes
insolvent
C owners cannot lose more than what they have invested in the business in the event that the
business becomes insolvent
D owners are not entitled to share in the profits of the business

1.1.3 A partnership has ……

A limited liability and limited continuity
B limited liability and unlimited continuity
C limited liability and limited continuity
D unlimited liability and unlimited continuity

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1.1.4 This company must first register the Memorandum of Incorporation before commence.
A State owned
B Close Cooperation
C Partnership
D Sole proprietor

1.2 Name the form of ownership represented by each of the following statements.
1.2.1 Past and current directors are jointly and severally liable for the debts of this company.
1.2.2 This business is owned by two or more people who pay tax in their personal capacity.
1.2.3 The government is the only shareholder in this company.
1.2.4 This form of ownership can no longer be registered but it is still in existence.
1.2.5 Themba (PTY) Ltd may not invite the public to buy shares. . (10)

Answers to the activity 1

1.1.1 C√√
1.1.2 B√√
1.1.3 D√√
1.1.4 A√√ (8)

1.2.1 Personal Liability company √√

1.2.2 Partnership√√
1.2.3 State owned company √√
1.2.4 Close Corporation √√
1.2.5 Private company √√ (10)

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14.3 FACTORS THAT CONTRIBUTES TO THE SUCCESS AND FAILURE OF THE
FORM OF OWNERSHIP

CRITERIA SUCCESS FACTORS FAILURE FACTORS

PARTNERSHIP
Capacity • Simple to establish a partnership entity. • In large partnership, the partners may struggle to agree on
• Encourages expansion as more partners join the business issues.
business. • The more partners in the partnership, the more difficult it is to
control expenses and partners' drawings.
Management • Partners are actively involved in management • Decision making can be time- consuming as all partners have
and may use the ideas of other partners. to be in agreement.
• Not all partners need to be actively involved in • Some management tasks may be neglected, as one partner
management and would rather appoint may leave it to others to complete.
competent managers. • Partners may disagree on how to run the business, which
• Partners have access to expertise of other may lead to tension between them.
partners when tough decisions have to be • Partners are agents of the partnership and bad management
made. decisions may be forced onto other partners.

Capital • Partnerships can be financially strong because • Partners may lose their capital contribution if the business
many partners contribute. fails.
• Smooth cash flow as there is enough working • Partners don’t contribute skills which might be unfair to
capital. partners who also have skills.
• Partners may not all have capital to put into business when
needed.
• Unequal inputs as some partners put in expertise instead of
cash.
Legislation • Easy and expensive to establish/partners must • An oral agreement may create problems for partners in future
draw up partnership agreement. which can affect its success.
• Partnerships may apply for local tenders. • Partners are jointly and severally liable for business debts.
• Partners are more motivated to make a success • Unlimited liability/ partners are jointly and severally liable for
because their personal possessions are at risk. the debts of the business.
• If one partner dies or retires, the remaining partners need to
draw up a new agreement.

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Taxation • Partnerships pay VAT only on relevant products • Failure to comply with tax regulations by one or more partners
sold/services rendered which reduces tax may lead to business closure.
administration. • Individual tax paid by partners on income earned is higher
• The partnership does not pay income tax, only than fixed tax rate percentage paid by companies/close
the partners in their personal capacities. corporations.
• High-earning partners pay more tax, which may discourage
other partners from joining the partnership.
• Partners may withdraw more cash to reduce their tax burden
which may cause cash flow problems for the partnership.
Division of • Partners share profits according to their • Amount of work done may not be equal to the amount of profit
profits contributions. that each partner receives.
PUBLIC COMPANY
Capacity • Can raise large amounts of capital as shares/ • Very costly to maintain infrastructure and large employee
debentures can be sold to the base.
public/shareholders. • Large amounts of capital required to start a public company.
• Share capital clause in the Memorandum of • Large capacity of the company can also lead to its downfall in
Incorporation (MOI) may be changed to issue that structures and processes may become too costly.
more shares.
• May attract financially strong investors if share
value increases/remain stable.
Management • Management is in the capable hands of a board Directors may not have a direct interest in the company,
•
of directors who have skills/knowledge/ abilities. which can hamper growth and profit maximisation.
• Shareholders can vote for/appoint the most • Large management structure can result in decision making
capable directors to manage their company. taking time.
• Directors' fees increase the company's expenses which
reduces net profit.
• Management may open to legal challenges if their reports do
not comply with King Code 111.
Capital • Can raise large amounts of capital as shares/ • Shareholders are entitled to see a company’s financial
debentures can be sold to the statements which impacts on the privacy of the company.
public/shareholders. • Growth is limited if sufficient capital cannot be raised.
• Amount of shares available can be increased to • Share prices change all the time and can lose their value.
raise capital.
Legislation • The company and its owners (shareholders) are • Formation procedures are time consuming/complicated/
separate entities, which may encourage more expensive, as many legal documents need to be
people to join the company. prepared/submitted.
• Limited liability allows for greater risk taking, • High formation/establishment expenses require large start-up
which may lead to growth of the business. capital.

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• Auditing of financial statements, gives • Annual audit of financial statements is costly.
shareholders the assurance that the business is • If a public company does not comply with legislation, its
being properly managed. licence maybe withdrawn by the Companies and Intellectual
Property Registration Office (CIPRO)/Companies and
Intellectual Property Commission (CIPC.
Taxation • Can obtain tax rebates if they are involved in • Subject to double taxation e.g. shareholders pay secondary
SCI projects. tax this can have a negative impact to a company that is
• Can obtain government tenders and renew their already financially struggling.
licenses if they do not evade tax.
Division of • Profits could be split between company and • Dividends are not always paid out which may discourage new
profits shareholders. investors.
• Shareholders receive return on investment, • Subject to double taxation e.g. shareholders pay secondary
when dividends are paid out according to the tax this can have a negative impact to a company that is
type and number of shares held in the company. already financially struggling.
• Large profits may be used for expansion/kept in
a reserve fund for future growth.
PRIVATE COMPANY
Capacity • Large amount of capital can be raised since • It cannot grow into a very large business since it cannot invite
there is no limit on the number of shareholders. the public to buy shares.
• The company can access long term capital and • Restrictions on transferability of shares may discourage
therefore has good long term growth people from joining the company.
opportunities. • If the company fails to attract financially strong shareholders,
it may hamper its growth opportunities.
Management • Management is in the capable hands of a board • Shareholders have the power to elect suitable directors, but
of directors who have skills, knowledge and not all shareholders exercise their voting rights.
abilities. • Directors may sometimes act in their own best interests, not in
• Shareholders can vote for/appoint the most the company’s best interests.
capable directors to manage their company.
Capital • Even though shares are not freely transferable, • Large amount of capital cannot be obtained because capital
large private companies can raise considerable contribution is only limited to private shareholders.
amount of capital.
Legislation • Procedures to form a private company have • Formation procedures are time consuming/complicated/
been simplified by the new Companies Act 71 of expensive, as many legal documents need to be
2008. prepared/submitted.
• Limited liability allows for greater risk taking, • High formation/establishment expenses require large start-up
which may lead to growth of the business. capital.

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• Auditing of financial statements (if required), • Annual audit of financial statements (if required) is costly.
gives shareholders the assurance that the • If a private company does not comply with legislation, its
business is being properly managed and licence maybe withdrawn by the Companies and Intellectual
supports raising additional finance. Property Registration Office (CIPRO)/Companies and
• There is no longer a limit on the number of Intellectual Property Commission (CIPC).
shareholders in a private company.
• A private company can benefit from government
programmes if they comply with the relevant
legislation.
• Personal liability of share-holders does not affect
the company's assets.
Taxation • Can obtain tax rebates if they are involved in • Subject to double taxation e.g. shareholders pay secondary
SCI projects. tax this can have a negative impact to a company that is
• Can obtain government tenders and renew their already financially struggling.
licenses if they do not evade tax.
Division of • High profits and good returns to shareholders • Shareholders may sell their shares when dividends are low,
profits indicate the success of a company, which resulting in a drop in share prices.
increases the value of shares. • Dividends are not always paid out which may discourage new
• Profits generated can be re-invested to expand investors.
business operations.
• Shareholders receive profits according to the
type and number of their shares.
SOLE PROPRIETOR
Capacity • Easy to control since it is a small business. • Difficult to continue and grow long term.
• Difficult to get good, well-trained staff as they are expensive.
• Owner has to manage and carry out all business functions.

Legislation • No registration required to establish this • Personal debts and business debts are one.
business. • Must comply with relevant municipal regulations to avoid
• Expensive annual audit of financial statements closing down.
is not required. • The owner is personally liable for the business debt; he/she
• Unlimited liability may encourage the owner to may be reluctant to take calculated risk.
work harder to ensure the success of the
business.

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Taxation Owner only taxed on profits in personal
• • If profits get too big may end up paying high tax in personal
capacity. capacity.
• Depending on how much income the owner • Failure by the owner to comply with personal income tax
earns, his/her tax rate may be lower than the regulations could lead to substantial financial penalties
company tax rate. imposed by SARS.
• If the owner earns below a certain threshold
amount per year, no income tax is payable and
the business’s profits are thus not taxed.
Capital • Capital can be carefully spent and managed. • Limited capital available for expansion.
• The owner may be able to borrow money from a • Cannot appoint people with large salaries.
financial institution, especially if he/she has • Owner responsible for any capital borrowed.
assets that can be used as surety for a loan.
Management • One owner so there is no disagreements. • Owner has to do all the administration, management and
• Can make quick decisions without having to decision-making in the business.
consult others. • Owners has to rely on own decisions and could make
incorrect ones.
Division of • Owner receives all profits from the business • Owner needs to budget carefully so that business debts are
profits which can lead to capital growth. covered.
• If the owner does not make a profit, the income and livelihood
of the owner may be severely affected.

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You need to know the characteristics, advantages and

disadvantages of all forms of ownership. This will enable you to
evaluate the factors that contribute to the success and/ or failure
of each form of ownership. These factors form part of the
advantages (success) and/ or disadvantages (failure) of each form
of ownership

ACTIVITY 2

2.1 Read the scenario below and answer the questions that follow:
Grobler and Sons want to establish a private company. Their business proposal contains the
following aspects:
• Name of the company will end with LTD.
• Complete the memorandum of association and articles of association.
• Appoint one director.
• Maximum of fifty shareholders.

2.1.1 Evaluate Glober and sons' business proposal in terms of the characteristics of the private
company and make recommendations for improvements. (12)
2.1.2 Explain the differences between a private company and a state owned company. (8)

ANSWERS TO ACTIVITY 2
2.1.1 Evaluation of a private company based on the above aspects.

• The name of the company does not end with LTD.√

• The memorandum of association and article association do no longer exist.√
• The company is no longer managed by one director.√
• The shareholders are no longer limited to fifty people.√ Sub max (4)

Recommendations
• The name of the private company must end with (PTY) Ltd.√√
• The company must file the Memorandum of Incorporation (MOI) with the Companies
and Intellectual Property Commission (CIPC).√√
• The company can appoint three or more directors √√
• The number of shareholders can be more than fifty.√√ Sub max (8)
Max (12)

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2.1.2 Differences between a private company and a state owned company

Private company State owned company
-The company name ends√ in (PTY) -The company name ends√ with
Ltd√ SOC.√
-Shareholders share the profit√ of -Profits are distributed √ to all
the company in the form of a sectors.√
dividend.√
-Does not offer√ essential services.√ -Offer essential services√ which may
not be offered by the private sector.√
-Charge high prices√ for goods and -Prices are kept√ reasonable.√
services.√
Sub max (4) Sub max (4)
Max (8)

ACTIVITY 3

3.1 Explain factors that contribute to the success/failure of state owned

company in terms of the following criteria:
3.1.1 Capital (4)
3.1.2 Management (4)
3.1.3 Legislation (4)

ANSWERS TO ACTIVITY 3
FACTOR SUCCESS FAILURE
Capital • A large amount of • Shares are not freely
capital can be raised√ transferable, so less
since there is no limit capital can be
on the number of raised/Prohibited √ by
shareholders.√ its Memorandum of
• Large amount of capital Incorporation (MOI)
enhances growth√ and from offering its shares
advancement in to the public, which
technology for the limits the amount of
SOC.√ capital that can be
• The company can raised for expansion.√
access long term
capital√ and therefore
has good long term
growth opportunities.√
Max (4)

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Management • Management is in • Directors may not have a
the capable hands of direct interest in the
a board of directors’ company√, which can
√ that have skills, hamper growth and profit
knowledge and maximization.√
abilities.√ • SOC and its shareholders
• Shareholders can are compelled to budget a
vote for/appoint √ larger amount√ for
the most capable directors' remuneration to
directors to manage attract the best directors.√
their company.√
• Directors are jointly • Directors' fees increase√
and severally liable the company's expenses
for all company's which reduces net profit.√
debts and liabilities
incurred. √ This
forces them to act
responsibly and
work harder towards
the success of a
company.√
Max (4)
Legislation • The company and its • Lengthy registration
shareholders are requirements may
separate entities√, delay the actual
which may operation of the
encourage more business√ and
people to join the shareholders can
company.√ loose on profitable
• Directors are forced opportunities.√
(by the Act) to act • It is expensive to
responsibly√ and work register this form of
harder towards the ownership √ which
success of the increases business
company to protect expenses hence
their personal reducing profit.√
assets.√ • The drafting of
• May obtain government directors'
tenders√ a is properly performance
registered in compliance contracts may be
with the Companies time
Act.√ consuming/expensiv
e√ and increase
costs.√
Max (4)

ACTIVITY 4

4.1 Read the statement below and answer the questions that follow

Christopher wants to start a business that will enable the shareholders to have limited
liability even though he will be subjected to unlimited liability as a director of the company.
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4.1.1 Name the form of ownership that is applicable to the scenario above. Motivate your
answer by quoting from the scenario. (3)
4.1.2 Justify the effectiveness of the form of ownership identified in QUESTION 4.1.1 (8)
4.1.3 Explain the differences between the form of ownership identified in QUESTION 4.1.1 with
the public company. (8)

ANSWERS TO ACTIVITY 4
4.1.1 Personal liability company√√ (2)

Motivation
Christopher will be subjected to unlimited liability as a director of the company.√ (1)

4.1.2 Effectiveness of the personal liability company

Positives/Advantages
• More opportunities √ to pay less taxation.√
• Good long-term √growth opportunities.√
• Own legal identity √ and shareholders have no direct legal implications.√
• Employ or elect own management√ and the directors. √
• Not required to file annual financial statements √ with the commission.√

AND/OR
Negatives/Disadvantages
• Requires a lot of capital√ for establishment.√
• The more shareholders √, the less profits. √
• More taxation requirements√ as it has a limited liability.√
• Annual financial statements must be reviewed by a qualified person√, which is an extra
expense to the company. √ Max (8)

4.1.3 Differences between the Personal Liability Company and public company.
Personal Liability Company Public company.
• The name ends in INC√ • The name ends in Ltd. √
• Public cannot buy√ shares in • Public can buy shares √in company√
company√
• Raises capital√ by issues shares to • Raises capital √ by issuing shares to
its shareholders. √ the public and borrowing capital by
issuing a debenture√
• Financial statements must be • Annual financial statements√ need to
independently reviewed√ but not be audited.√
necessarily audited.√
• Does not need to publish a • Have to register and publish√ a
prospectus√ as it cannot trade its prospectus with CIPRO.√
shares publicly.√
• The company is not required to • Must raise a minimum subscription
raise√ the minimum subscription/ prior√ to the commencement of the
issue minimum shares.√ company.√
Sub max (4) Sub max (4)
Max (8)

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