5FORMS OF OWNERSHIP CHAPTER 16 POST COVID

BUSINESS STUDIES
GRADE 12
TERM 4
CHAPTER 16
NOTES ON FORMS OF OWNERSHIP
CHARACTERISTICS/ADVANTAGES & DISADVANTAGES
POST COVID-19: REVISED
2020
TABLE OF CONTENTS
TOPICS PAGES
Exam guidelines for forms of ownership 2
Terms and definitions 3
List of the forms of ownership 4
Meaning of limited liability and unlimited liability 4
Characteristics and impact of a sole trader 4-5
Characteristics and impact of a partnership 5-6
Characteristics and impact of a Close Cooperation 6-7
Characteristics and impact of a private company 7-8
Characteristics and impact of a personal liability company 8-9
Characteristics and impact of a public company 9-10
Characteristics and impact of a state owned company 11
Difference between the private and public company 12
Difference between the private and a personal liability 12
company
Characteristics and impact of a non-profit company 12-13
Characteristics and impact of co-operatives 13-14

This chapter consists of 14 pages.

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CONTENT DETAILS FOR TEACHING, LEARNING AND ASSESSMENT PURPOSES

Learners must be able to:
• Discuss/Explain the characteristics of each form of ownership.
• Explain the meaning of limited liability and unlimited liability.
• Discuss/Explain/Evaluate the impact (positives/advantages and/or negatives
/disadvantages) of the different forms of ownership.

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TERMS AND DEFINITIONS

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
Incorporation (MOI) shareholders and directors.(serves as a constitution of a company).
Sole Trader /Sole A business is owned and controlled by one person who takes all the
proprietor decisions, 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 one or more persons.

Personal liability A personal liability company is a voluntary association of one or more

company person.
State-Owned A state-owned company (SOC) is a legal entity that is created by the
company government in order to participate in commercial activities on its
Partnership behalf.
A document that contains exhaustive provisions with regards to the
Article matters 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
Meeting (AGM) stating how well the company has done.
Directors People elected to the board of a company by the shareholders to
represent the shareholders’ interests.
Audit Process where an organization’s accounts are checked to make sure
its financial operations are honest

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FORMS OF OWNERSHIP
The following forms of ownership will be dealt with in detail in this chapter:
• Sole trader/Proprietor
• Partnership
• Close Co-operation
• Private company
• Personal liability company
• Public company
• State-owned company
• Co-operatives

1 Meaning of limited liability and unlimited liability

1.1 Meaning of limited liability
• This is when shareholders are only liable for the amount that they invested in the
company.
• Example: If the business is bankrupt, the personal possessions of shareholders
cannot be used to pay for the debt of the business.

1.2 Meaning of limited liability

• This is when the owner(s) are personally responsible for all the debts of the
business.
• Example: If the business is declared bankrupt, the personal possessions of the sole
trader and partners may be sold to pay off the debts of the business.

CHARACTERISTICS OF EACH FORM OF OWNERSHIP

2 SOLE TRADER/ PROPRIETOR

2.1 Definition
• A sole trader is a business that is owned and managed by one person.
• The business owner handles everything including the activities of the business, its
processes and decisions.
• It is most suitable for service businesses such as a doctor/hairdresser/electrician etc.

2.2 Characteristics of a sole proprietor

• Owner can sell the business to anyone at any time.
• There are no legal requirements regarding the name of the business
• It is easy to establish as there are no legal formalities in forming the business.
• Sole traders are not compelled by law to audit financial statements
• The owner has a personal interest in the management and the services that is
rendered.
• The owner has unlimited liability/The owner is personally liable for the debt of the
business.
• A sole trader has limited company for expansion and lacks continuity of existence.
• The business has no legal personality and therefore has no continuity/Continuity
depends on the life and health of the owner.

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• The owner provides capital from his/her saving/borrow money from the bank.
• The owner has a personal interest in the management and the services that is
delivered.
• Profit is added to the rest of the owner’s taxable income.
• There are no special requirements when the owners want to close the business.

2.3 Impact of a sole trader

Positives/Advantages and/or Negatives/disadvantages
Positives/Advantages Negatives/Disadvantages
-Owner has the freedom to make all -Unlimited liability which means that the owner is
decisions/ Quick and easy decisions can personally liable for all the debts and losses
be made suffered by the business.
-Requires little capital to start. -The owner is responsible for providing all the
capital needed which may be difficult to raise a
big amount.
-All profits belong to the owner -Growth of business can be restricted due to lack
of capital.
-Simple management structure. -Not a legal entity and no continuity
-Can easily adapt to the needs of the -Difficult to attract highly skilled and
client/customer. knowledgeable employees.
-No legal process and requirements. -Tax is calculated according to a progressive
income system, which can be up to a maximum of
40%.
-The assets of the business belong to the -If the owner does not have enough
owner personally. knowledge/experience the business may fail.
-There is personal encouragement and -It is not always possible to pay high salaries.
personal contact between the owner and
customers.

3 PARTNERSHIP
3.1 Definition
• A partnership has two or more partners who own the business.
• An agreement between two or more people who combine labour, capital and
resources towards a common goal.
• Partners share the responsibility of the business and they share the financial and
management decision of the business.

3.2 Characteristics of a partnership

• Partners combine capital and may also borrow capital from financial institutions.
• Profit is shared according to the partnership agreement.
• Partners share responsibilities and they are all involved in decision making
• No legal requirements regarding the name of the business.
• No legal formalities to start, only a written partnership agreement is required.
• Partnership has no legal personality and therefore has no continuity.
• The partnership does not pay income tax, only the partners in their personal
capacities.
• Auditing of financial statements is optional.

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• Partners have unlimited liability and are jointly and severally liable for the debts of the
business.
• Partners share responsibilities and they are all involved in decision making.
• Diversity/Specialisation/Different skills of the partners can be used.

3.3 Impact of a partnership

Positives/Advantages and/or Negatives/disadvantages
Positives/Advantages Negatives/Disadvantages
-The partners able to put their knowledge and -A partnership has unlimited liability which
skills together to collectively make the best means that partners risk losing their personal
decisions. possessions.
-The workload and responsibility is shared -Each business partner is legally responsible for
between partners. the joint liability of the partnership.
-Partners are able to share resources. -Different personalities and options of partners
can lead to conflict it disagreements.
-Partners are only required to pay tax in their -Partners might not all contribute equally.
personal and individual capacity.
-The partners have a personal interest in the -Loss in profits and stability of the business can
business. occur if a partner resigns/dies/loses interest in
the business or is declared bankrupt.
-Can bring in extra partners at any time. -There can be lack of capital and cash flow.
-Attract prospective employees with the option -Profits are divided between partners according
or incentives of becoming a partner. to the partnership agreement and not according
to the income distributed.
-Each partner can focus on their own individual -In large partnership, the partners may struggle
strengths when sharing the workload. to agree on business issues.
-May find it easy and inexpensive to establish -Partnership lacks continuity, if one partner
even with a written agreement. dies/retires, the remaining partners need to draw
up a new agreement.

4 CLOSE CORPORATION
4.1 Characteristics of a close corporation
• Can have a minimum of one and maximum of ten members who share a common
goal.
• The name must ends with the suffix CC
• Profits are shared in proportion to the member’s interest in the CC.
• A CC has its own legal personality and therefore has unlimited continuity.
• Each member makes a contribution of some/assets/services towards the corporation.
• The word ‘close’ means that all members are involved and participate in its
management.
• Members have unlimited liability except where the CC has had more than ten
members for six months or longer.
• Auditing of books is optional as members only need an accounting officer to check
financial records.
• Transfer of a member’s interest must be approved by all other members.

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4.2 Impact of a close corporation

Positives/Advantages and/or Negatives/disadvantages
Positives/Advantages Negatives/Disadvantages
-There are few legal requirements e.g. -Limited growth and expansion since a CC
auditing of financial statements/regular cannot have more than ten members.
annual general meetings.
-A CC is a legal entity and has continuity -A member of a CC can be held personally
of existence. liable for the losses of CC if the member
acts is incompetent.
-Can be converted to a private company -Audited financial statements may be
and members may become shareholders. required when applying for a loan.
-Members have limited liability -A CC is taxed as if it were a company,
which may be higher than personal tax
rates.
-Owners’ interest in the CC does not -Difficult for members to leave the CC as all
need to be in proportion to their capital members must agree to dispose of a
contribution. member’s interest.
-CC may be exempted by CIPC from -A CC is taxed on its income and Standard
auditing its financial statements. Tax of Company (STC) based on member’s
dividends/ Double taxation.

5 PRIVATE COMPANY
5.1 Definition
• A private company can be formed by owner called a shareholder.
• It can be a small or large company and has one or more directors.

5.2 Characteristics of a private company

• It needs a minimum of one shareholder and there is no limit on the number of
shareholders
• Requires one or more directors and one or more shareholders.
• Raises capital by issuing shares to its shareholders.
• The company name ends with letters (PTY) Ltd.
• Investors put capital in to earn profit from shares.
• The company has a legal personality as well as unlimited continuity
• The auditing of financial statements is optional.
• A private company is not allowed to sell shares to the public.
• Shareholders have limited liability and a separate legal entity.
• Profits are shared in the form of dividends in proportion to the number of shares held.
• Register with the registrar of companies by drawing up Memorandum of
Incorporation.
• Shareholders have a limited liability and will not lose their initial capital invested if the
business goes bankrupt.

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5.3 Impact of a private company

Positives/Advantages and/or Negatives/ Disadvantages
Positives/Advantages Negatives/Disadvantages
-Shareholders can vote for/ appoint the -Requires a lot of capital for establishment
most capable directors to manage their
company.
--A company has continuity of existence -Large management structures can result
in decision-making taking time
-Own legal identity and shareholders have -The private company is not allowed to sell
no direct legal implications/ limited liability. shares to the public.
-Managed at least by one competent highly - Directors may sometimes act in their own
skilled director. interest, not in the company's best interest.
- Large amount of capital can be raised -Annual financial statements must be
since there is no limit on the number of reviewed by a qualified person, which is an
shareholders. extra expense to the company.
-The company can access long term -Difficult and expensive to establish as the
capital and therefore has good long term company is subjected to many legal
growth opportunities. requirements
-Even though shares are not freely -Pays tax on the profits of the business
transferable, large private companies can and on declared dividends/Subject to
raise considerable amount of capital. double taxation.
-Not required to file annual financial -Financial statements must be reviewed by
statements with the commission. a qualified person, which is an extra
expense to the company.
-It is possible to sell a private company as -Directors will be held personally
it is a legal entity in its own right. responsible for debts if it can be proven
that that they committed fraud.
-The management of the company can - Some shareholders may not exercise
improve since directors are accountable to their voting rights resulting in choosing the
shareholders. wrong person as a director.

6 PERSONAL LIABILITY COMPANY

6.1 Definition
• Very similar to a private company, the difference is that the directors of a Personal
Liability company are jointly and severally liable for all the debts and liabilities of the
company. This means that the directors have unlimited liability.
• The name of the personal liability company ends in INC and the name of the private
company ends in (PTY) Ltd.

6.2 Characteristics of a personal liability company

• The company name must end with letters INC
• Directors have unlimited liability and they are jointly liable for the debts of the
business even if they are long out of office.
• The memorandum of Incorporation should state that it is a personal liability
company.
• They must at least have one director on their board of directors.
NOTE: Other characteristics of a personal liability company are the same
as the private company except the above mentioned two characteristics.

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6.3 Impact of a personal liability company

Positives/Advantages and/or Negatives/disadvantages
• NOTE: The advantages of a personal liability company are the same as the private
company.
• The disadvantages are also the same as the private company except that the
directors of the personal liability company have unlimited liability.

7 PUBLIC COMPANY
7.1 Definition
• A public company is a company that is registered to offer its stock and shares to the
general public. This is mostly done through the Johannesburg Securities/Stock
Exchange (JSE).
• The public company is designed for a large scale operation that require large capital
investments.

7.2 Characteristics of a public company

• A minimum of one person is required to start a public company.
• The company name ends with letters Ltd
• Shareholders have a limited liability.
• Has legal personality and therefore has unlimited continuity
• Requires three or more directors and three or more shareholders.
• Profits are shared in the form of dividends in proportion to the share held
• A prospectus is issued to the public to raise capital.
• A public company is required to hold an AGM (Annual General Meeting).
• Register with the Registrar of Companies by drawing up Memorandum of Incorporation.
• Raises capital by issuing shares to the public and borrowing capital by issuing a
debenture.
• Auditing of financial statements us compulsory and audited statements are available to
shareholders and the public
• The new Act forces personal liability on directors who knowingly participated in carrying
out business in a reckless/fraudulent manner.

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7.3 Impact of a public company

Positives/Advantages and/or Negatives/Disadvantages
Advantages Disadvantages
-The business has its own legal -Must disclose all financial information which
identity and can own assets/ property. can be used by its competitors.
-Easy to raise funds for growth -Large amount of funds are spent on financial
through the sale of shares. audits.
-Shareholders have a limited liability -Directors may not be motivated to work very
for the debt of the hard because share-holders decide on the
company/Shareholders may only directors' remuneration
loose the amount which they invested.
-Managed by at least one competent -Directors may not have a direct interest in the
highly skilled director. company, which can hamper growth and profit
maximisation
-The management of the company -Directors' fees increase the company's
can improve since directors are expenses which reduces net profit.
accountable to shareholders.
-Shareholders can sell/transfer their - A full report must be submitted to the major
shares freely. shareholders each year
-The public has access to the -Some shareholders may not exercise their
information and this could motivate voting rights resulting in choosing the wrong
them to buy shares from a company. person as a director.
-Additional shares can be raised by -Large management structure can result in
issuing more shares or debentures decision making taking time.
-Strict regulatory requirements protect -Financial affairs must be known to publicly, this
shareholders. information could be used to competitors’
advantage.
-Directors bring creative ideas which -Management may be open to legal challenges
encourage innovation/high if their reports do not comply with King Code III.
productivity/efficiency in the company
-Shareholders can vote for/appoint -Difficult and expensive to establish as the
the most capable directors to manage company is subjected to many legal
their company requirements
-Auditing of financial statements,
gives shareholders the assurance that
the business is being properly
managed and supports raising
additional finance
-Additional capital can be raised by
issuing debentures to the public
-Attracts small investors as shares can
be transferred freely/ easily.
-No limitation on the number of
shareholders, so growth/ expansion is
not limited.
-Additional capital can be raised by
issuing debentures to the public
-The public has access to the
company's financial information as
financial reports have to be published
annually.

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8 STATE-OWNED COMPANY
8.1 Definition
• A state owned company has the government as its major shareholder and falls under
the department of Public Enterprise.
• These companies take on the role of commercial enterprise on behalf of the
government.

8.2 Characteristics of a State-Owned Company

• The name ends with letters SOC.
• SOC is listed as a public company.
• It is owned by the government and operated for profit.
• Requires three or more directors and one or more shareholders.
• Register with the Registrar of Companies by drawing up Memorandum of Incorporation.
• State-owned companies support private businesses by providing infrastructure such as
communication service /Post office and supply of electricity/Eskom.

8.3 IMPACT OF STATE OWNED COMPANIES

Positives/Advantages and/or Negatives/Disadvantages
Positives/Advantages Negatives/Disadvantages
-Profits may be used to finance other -May result to poor management as
state departments government is not always as efficient as the
private sector.
-Offer essential services which may -Inefficiency due to the size of the business
not be offered by the private sector
-Prices are kept reasonable/Create sound -Often rely on government subsidies which
competition with the private sector to may not cover all the company’s expenses
make services affordable to more
citizens.
-Wasteful duplication of services is -A lack of incentive for employees to
eliminated perform if there is no absence of other
motivator such as productivity bonuses.
-Planning can be coordinated through -Government can lose money through the
central control. business.
-Generates income to finance social -A lack of incentive for employees to
programmes. perform if there is no share in the profit.
-Jobs are created for all skills levels. -Losses must be met by the tax payer.
-Shares are not freely tradable making it
difficult to raise capital.
-SOC must follow strict regulations for
operations to raise capital.
-Financial statements must be audited

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9 Differences between the private and public company

PRIVATE COMPANY PUBLIC COMPANY
- May no offer shares to the - Trades its shares publicly on the
general public. Johannesburg Securities Exchange.
- Shares are not freely transferable - Shares are freely transferable.

- Minimum of one director. - Minimum of three directors.

- Name must end with Proprietary - Name must end with Limited/Ltd.
Limited/(Pty) Ltd.
- Annual financial statements need - Annual financial statements need to be audited
not be audited and published. and published.
- Does not need to publish a - Have to register and publish a prospectus with
prospectus as it cannot trade its the Companies and Intellectual Property
shares publicly. Commission/CIPC.
- The company is not required to - Must raise a minimum subscription prior to
raise the minimum subscription/ commencement of the company.
issue minimum shares.

10 Differences between the private and a personal liability company

PRIVATE COMPANY STATE OWNED COMPANY
The name ends with (PTY) Ltd The name ends with INC
The directors are not personally liable The directors are personally liable for the
for the debts of the business. debts of the business.

11 NON-PROFIT COMPANIES

11.1 Definition
• A non-profit company/NPO I not formed with intent to make a profit, but established for
public benefit.

11.2 Characteristics of non-profit companies

• The main aim is to provide service and not to make a profit.
• They are funded by donations and foreign funding.
• The name of the company must end in NPC.
• All profits must be used for the primary objective of the non-profit company.
• It must prepare the Memorandum of Incorporation.
• Qualifying NPCs are granted tax-exempt status.

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11.3 Impact of non-profit companies

Positives/Advantages and/or Negative/Disadvantages of non-profit
companies
Advantages Disadvantages
-Profits are used solely for the -Need professional assistance to set up this
primary objective of the organisation. organisation
-They provide social services to -Does not generate enough capital to cover their
various communities. expenses.
-Donors receive tax deductions. -Donations may not always be enough.
-The liability of the members is limited -Assets are not distributed to the members upon
closing down.
-Has continuity of existence -Creating a non-profit company takes
time/effort/money.
-Most of the income of a non-profit -Obtaining grants can be a slow and tiring
company is free from income taxes. process.
-Can receive grants /financial aid -Incorporators cannot take along the assets
accumulated by the NPC if they decide to leave.
-Surplus of income is retained to -They are not allowed to pay bonuses to
further the goals of the business. members.

12 COOPERATIVES

12.1 Definition
• A cooperative is a traditional way of a group of interested parties getting together and
sharing resources/infrastructures and costs to achieve a better outcome .

12.2 Characteristics of cooperatives

• Minimum of five members is required to start a cooperative.
• The word ‘Cooperative Limited’ must appear at the end of its name.
• They are motivated by service rather than profit.
• They are managed by a minimum of three directors.
• Decisions are taken democratically
• Members own and run the business together and share equally in its profits
• Legal entity and can own land and open bank accounts.
• Must register with the Registrar of Cooperatives Societies
• The objective of a co-operative is to create mutual benefit for the members.

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12.3 Impact of cooperatives

Positives/Advantages and/or Negatives/ Disadvantages
Advantages Disadvantages
-Access to resources and funding -Decisions are often difficult to reach and
time consuming.
-Decision making is by a group -Difficult to grow a co-operative.
-Each member has an equal share in the -Very few promotion positions for staff.
business.
-A co-operative can appoint its own -It can be difficult to get a loan because their
management. main objective is not always to make a
profit.
-Members have limited liability -The success of cooperatives depends on
the support of the members.
-The decisions are democratic and fair -Shares are not freely transferable
-Members are motivated because they -All members have one vote regardless of
are working for themselves the number of shares held.
-Can gain extra capital by asking its
members to buy shares.
-Co-operatives have continuity of
existence
-Resources of many people are pooled
together to achieve common objectives
-Profits are shared equally amongst
members.

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