FORMS OF OWNERSHIP
There are certain factors that will influence the decision on which form of ownership to
choose.
1.1. The autonomy of the enterprise.
Certain forms of enterprise have a legal personality, which is also referred to as being
incorporated. Accordingly, these enterprises can exist independently of their owners. This
then implies that:
 under normal circumstances the owners are not, in their personal capacity,
responsible for the debts of the firm.
 in principle, the enterprise has an unlimited lifespan and is not dependant on the life
span of its owners
 ownership is transferable.
1.2. Establishment procedures and administrative requirements.
Certain forms of enterprise can be established only after lengthy and cumbersome
procedures while, for others, these have been streamlined to entail little effort and red tape,
This holds true for the legal and administrative requirements during the life of the enterprise.
1.3. Ownership and management
The extent to which the owners of the enterprise share in the management, profits and losses
varies. Where the enterprise has more than one owner there must be mutual agreement on
the matters mentioned.
1.4. Potential for the procurement of capital.
The nature and size of the enterprise will be indicative of the amount of initial capital required.
Future capital requirements and the need to expand must also be kept in mind. Initially, it is
mainly the number of owners and their personal creditworthiness that determine the
procurement potential of the enterprise.
1.5. Tax considerations.
Each form of ownership has its own unique tax structures and this will be normally taken into
consideration when deciding on what form of ownership will be most suitable. For example,
for sole proprietorship and partnerships the owner or partners pay tax in their personal
capacity while close corporations and companies pay tax at a fixed rate determined by the
minister of finance.
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SOLE TRADER
The Sole Trader refers to one of the oldest and most natural forms of enterprise where the
owner of the business is closely linked to the management and control of the business.
Traditionally bakeries, cafes, restaurants, butcheries and other small businesses were Sole
Traders but lately the advantages of the Close Corporation has seen many of these
businesses change their form of ownership.
Characteristics of a Sole Trader:
Legal autonomy
The Sole proprietor has no legal autonomy and the
law consequently views the business and the owner
as one entity
Liability.
Unlimited: since the law makes no distinction
between the business and the owner, all debts of the
business are also the debts of the individual and the
law can lay claim to his/her personal assets if a debt
needs to be recovered.
Continuity.
Limited: since the law makes no distinction between
the business and the owner, if the owner dies the
business ceases to exist in its current form.
Establishment procedures and Simple and inexpensive.
administrative requirements.
Ownership
One owner
Management and control
Normally the owner manages and controls the
business
Limited to the creditworthiness of the owner. Growth
and expansion can be hampered through a lack of
capital.
The Sole Trader does not pay company tax, but is
taxed in his/her personal capacity i.e. income tax.
Capital procurement potential.
Tax Structure.
Advantages
Easy to establish: there are no complicated legal
requirements to follow
Easy to manage: since the owner is usually the
manager there is no conflict of interest and can
adapt quickly to changing circumstances
Owner receives all profits generated by the
business
Owner has a personal interest in the success of the
business
Disadvantages
Owner is personally responsible for the liabilities of
the business.
Owner may focus on their strong points to the
detriment of other areas in the business.
Expansion and procuring of capital are limited to
the creditworthiness of the owner.
The owner and the life of the business are very
closely related - the death of the owner will mean
the demise of the business in its current form.
Easy to dissolve
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PARTNERSHIPS
The Partnership in South Africa is normally a group of professional like-minded people
(doctors, lawyers, attorneys, architects) who join their individual skill, management roles,
capital and administration knowledge to form one business.
Characteristics of a Partnership:
Legal autonomy
The Partnership has no legal autonomy and the
law consequently views the business and the
owners as one entity
Liability.
Joint and Severally Unlimited: since the law
makes no distinction between the partnership and
the owners, all debts of the business are also the
debts of the individual and the law can lay claim to
their personal assets if a debt needs to be
recovered.
Continuity.
Limited: since the law makes no distinction between
the partnership and the owners, if one of the
partners dies or retires the partnership ceases to
exist in its current form.
Establishment procedures and Relatively simple and inexpensive. A partnership
agreement is usually signed (although an oral
administrative requirements.
agreement is just as binding) called the Partnership
Articles (Deeds). It contains the following
information:
 main activity of the business
 the way disputes will be settled
 capital contributed by the owners
 name and details of partners
 duties of partners.
Ownership
2 – 20 partners
Management and control
Capital procurement potential.
Tax Structure.
Normally the partners manage and control the
business.
Limited to the creditworthiness of the partners.
Growth and expansion can be hampered through a
lack of capital.
Partners do not pay company tax, but are taxed in
their personal capacity i.e. they pay personal income
tax on their share of profits.
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Advantages
Skill, capital, management and objectives are
combined.
Fairly inexpensive and simple to form.
Each partner is liable for his own debts and will
therefore strive to make a success out of
everything
‘Monopolies’ can be formed and competition
eliminated.
Disadvantages
Because it is not a legal person, it has no
continuity and has unlimited liability.
Only 20 members restrict growth of business as it
restricts the capital base.
Arbitration might sometimes be necessary as
disputes in a Partnership can lead to a breakup of
the business.
COMPANIES
A company is a form of ownership for a business that usually needs a large capital
investment. A single owner is unlikely to have this amount of money and banks are not likely
to lend such a large amount of money to get the business up and running. People and other
businesses are invited to become owners in the business by buying a share in the business.
These owners are called shareholders of the company. A company is also formed by owners
who might not need a lot of capital or many investors, but who choose to form a company
because of the limited liability.
It is a form of business that has to be legally registered with the government as a business
that is separate from the owners. To do this, the owners have to complete legal documents
called a Notice of Incorporation* and a Memorandum of Incorporation (MOI)*. These
documents have to be submitted to the Companies and Intellectual Property Commission
(CIPC), a government department. A company has more administrative formalities and legal
requirements than any other form of business.
Because the company is a separate legal entity, the assets of the business belong to the
company and not the shareholders. The liabilities are also the responsibility of the company
and the assets of the shareholders cannot be used to pay back the debts of the business. If a
company is declared bankrupt, the shareholders can only lose the money they spent on
buying shares in the company.
There are five types of companies, but we will only be looking at two of them, a private
company and a public company. The owners of these companies are called shareholders
because they own a share of the business.
A private company is called 'private' because not everyone may buy a share in that
company. Once a private company has been registered, the shares that the shareholder
owns in the business can only be sold to someone else if all the other shareholders agree to
the sale. Every private company has the words (Pty) Ltd after the company name. Pty stands
for private and Ltd stands for limited liability.
A public company is called 'public' because once the company has been registered anyone
from the public or any business can buy and sell its shares. Every public company has the
words Ltd after the company name.
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Notice of Incorporation: a document to register a company with the government
Memorandum of Incorporation (MOI): a document stating the rights, duties
responsibilities of shareholders
and
Characteristics of Companies:
Legal autonomy
Yes
Liability.
Shareholders have limited liability
Continuity.
Unlimited
Establishment procedures
and administrative
requirements.
Not easy to form. A company has to be incorporated by
completing a Notice of Incorporation and a document
called a Memorandum of Incorporation (MOI) which has to
be sent to the CIPC.
Ownership
Minimum of one, with no limit to the maximum number
Management and control
Capital procurement
potential.
Tax Structure.
Owners (shareholders) do not manage the business but
appoint directors to manage the business for them.
Public companies are allowed to list on the Johannesburg
Stock Exchange (JSE). Own capital can be raised by a
public company by issuing shares to the public.
A company has to pay tax on its profits as it is regarded as
a 'legal' person.
Advantages
Because a company is a separate legal person, it
will continue to exist, even if the original
shareholders die or sell their shares.
Shareholders have limited liability.
Disadvantages
It is harder and more work to start a company than
the other forms of ownership.
The company is managed by directors and not the
owners, so the owners need to ensure that the
directors are making decisions that put the
interests of shareholders first.
Public companies and the JSE
Public companies are allowed to list on the Johannesburg Stock Exchange (JSE). Own
capital can be raised by a public company by issuing shares to the public. The public can then
freely trade these shares on the stock market.
The value or "size" of a publicly traded company is called its market capitalization, a term
which is often shortened to "market cap". This is calculated as the number of shares issued
(as opposed to authorized but not necessarily issued) times the price per share. For example,
a company with two million shares issued and a price per share of R40 would have a market
capitalization of R80 million.
Company profits can either be retained by the business or it can be paid to the shareholders
as their reward for investing in the company. The company profits payable to the
shareholders are called dividends. Dividends are paid per share owned. The more shares
owned the more dividends the investor will receive. For example, if a company makes R1m
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profit and decided to distribute the profits between the 200 000 shares issued to investors.
This implies that a dividend of R5 per share will be paid. If Mr X owns 250 shares in the
company, he will therefore receive R1 250 in dividends.
If all shareholders were to simultaneously try to sell their shares in the open market, this
would immediately create downward pressure on the price for which the share is traded
unless there were an equal number of buyers willing to purchase the security at the price the
sellers demand. So, sellers would have to either reduce their price or choose not to sell.
Thus, the number of trades in a given period of time, commonly referred to as the "trade
volume" is important when determining how well a company's market capitalization reflects
true fair market value of the company as a whole. The higher the volume, the more the fair
market value of the company is likely to be reflected by its market capitalization.
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