THE SOLE PROPRIETORSHIP

Let’s first define what is meant by a sole proprietorship. It is a business company that is
owned and managed by one person and has no partners or co‐owners. The owner can hire
people to work for the company. The sole owner provides all of the capital (i.e. money and
other assets) to run the company, makes all company decisions alone, manages the
enterprise, and accepts total responsibility for the profits and debts.

There are a number of other factors associated with a sole proprietorship. For example,
the lifetime of the enterprise is linked to that of the owner and there is no difference
between private and business property. This often has tax implications. Also, if the
enterprise fails and there are debts, creditors can pursue the owner’s personal assets.

At the same time, if the owner of a sole proprietorship business decides to discontinue
operations, a business can be terminated quickly. The owner will still be personally liable
for all the outstanding debts that a business cannot pay.

Table 1: Advantages and Disadvantages of a Sole Proprietorship

Advantages Disadvantages
From a legal point of view it is easy to start The credit worthiness of the enterprise is
and to close down a sole proprietorship. limited to the assets of the owner.
All income belongs to the owner. The owner is fully responsible for losses and
can lose her/his private possessions if the
enterprise should fail.
The functioning of the enterprise is simple If the owner dies, the enterprise may cease
and can be easily adapted to changing to exist.
circumstances.
Being your own boss: sole proprietors If it is sold or taken over, the enterprise no
always think working for a company is not longer exits, must be legally constituted
so appealing than when one runs one’s from beginning
business. Making mistakes in your business
becomes your responsibility but so are your
successes!
No special taxes paid as taxes are based on The future of the enterprise is limited not
personal tax rate. only in terms of its establishment, but also
in terms of expansion.
There are no special legal restrictions as it A sole proprietorship can develop to a level
is the least regulated form of ownership. where it exceeds the owner’s capital
means. If more capital is to be secured,
then the form of the enterprise may have
to be changed.
Once all expenses are paid what remain as Feeling of isolation: Running a business
profit after tax belongs to the owner. alone allows maximum flexibility but also
creates a feelings of isolation because no
other new business ideas come other than
his own

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 Advantages Disadvantages
The future of the enterprise is limited not
only in terms of its establishment, but also
in terms of expansion. A sole proprietorship
can develop to a level where it exceeds the
owner’s capital means. If more capital is to
be secured, then the form of the enterprise
may have to be changed.

PARTNERSHIPS
A partnership is formed when a group of people agree to combine their capital, labour,
know‐how and experience with the aim of making a profit. At least two and not more than
20 people conclude an agreement preferably drawn up by an attorney and should contains
names of the partners, name and nature of the enterprise, and establishes the
contribution, salaries of the partners, division of profits and other aspects of the
partnership.

Table 2: Advantages and Disadvantages of a Partnership

Advantages Disadvantages
Opportunities of obtaining capital are It is not always easy to find suitable
usually favourable and each partner can partners. Partners are jointly liable for the
contribute to the capital of the enterprise. debt incurred by the other partners.
The legal requirements, such as a Each partner is a principal and an agent of
partnership agreement, can be dealt with the enterprise and can commit his partners
easily. by his actions, for an example, by
accumulating debts.
Pools management techniques, judgment The partnership is dissolved if there is any
and special characteristics of a number of change in its composition thus the life
people expectancy of the partnership is uncertain.

Partners are taxed in their personal It is sometimes difficult for a partner to

capacity, profits are shared and taxed withdraw from an agreement.
separately

PRIVATELY‐HELD CORPORATION (PRIVATE COMPANY)

There are several differences between a private company and a business ownership
structures discussed previously in this part of the course. Technically a company is a legal
person in its own right. It has a ‘life’ independent of its shareholders. There are various
kinds of companies, like the private company, the public company, and the company
limited by guarantee (such a company does not issue shares and is not profit‐orientated).
In general, a private company is the most suitable type for a small businessperson. In many
countries, a private company is limited to a maximum number of shareholders (e.g. 50),

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 must be registered with the Registrar of Companies and is identified by the words
‘(Proprietary) Limited’, ‘(Pty) Ltd’, or Limited Liability Company (LLC) after its name.

Since most entrepreneurs will either begin with or migrate to a private company structure
over time, let’s take a look at the advantages and disadvantages this kind of business
ownership model.

Table 3: Advantages and Disadvantages of a Private Company

Advantages Disadvantages
The company is a legal person in its own A private company must meet various extra
right therefore exists independently from costs, such as founding costs, annual
its shareholders. This status overcomes subscriptions and the cost of issuing shares.
some of the disadvantages of a sole
proprietorship and a partnership.
A company’s shareholders have limited There are extensive prescriptions for
liability for the debts incurred by the establishing and managing the company.
company.
Shares and therefore ownership can be Owing to the compulsory publication of its
transferred. statements, constitution, etc., the company’s
business is known to everyone, including its
competitors.
The private company is free of many
formalities required of a public company.
The company and its members are taxed
separately

TOPIC SUMMARY
You have now completed this topic on the legal forms of business ownership. You should
now be able to describe the common legal forms of business ownership generally used by
small businesses, their advantages and disadvantages. In addition you now have a better
understanding of a business ownership factors to be considered by entrepreneurs before
setting up a business. Before you move on to the next topic, take a moment to reflect on
what you have learned by answering the following questions.

Self‐Reflection Questions
Does the concept of limited liability apply to a sole proprietorship? Why or why not?
Forming a corporation is more complex than forming a partnership. Why do you think
that is the case? Explain and support your answer with examples. Why would
investors tend to favour a new business led by management team over one owned and
managed by a lone entrepreneur? Is this justified?

Write your answers in your personal journal.

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