Business Studies – Grade 12

Topic 3b:
Forms of Ownership

FORMS OF OWNERSHIP
FACTORS THAT CONTRIBUTE TO THE SUCCESS OF FAILURE OF A BUSINESS:
The following factors may contribute to the success of failure of a business:
1.
2.
Capacity
Taxation
3.
4.
5.
6.
Management
Capital
Division of profits
Legislation

FORMS OF OWNERSHIP
FACTORS THAT CONTRIBUTE TO THE SUCCESS OF FAILURE OF A BUSINESS:
1. Capacity
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Refers to the size of a business, as well as to a business’s ability to produce and expand.
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Depends largely on a business’s infrastructure and number of employees.

FORMS OF OWNERSHIP
FACTORS THAT CONTRIBUTE TO THE SUCCESS OF FAILURE OF A BUSINESS:
2. Taxation
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
All businesses pay income tax.
Tax is calculated on the amount of profit a business makes – remember Profit = Income – Expenses.
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Sole proprietorships and partnerships do not pay tax
– owners pay tax in their personal capacity.
VAT-registered businesses pay VAT.
Close Corporations, private companies and public companies also pay dividend tax.
Sole proprietorships and partnerships are taxed at different rates than Close Corporations, private companies and public companies.

FORMS OF OWNERSHIP
FACTORS THAT CONTRIBUTE TO THE SUCCESS OF FAILURE OF A BUSINESS :
2. Taxation

Different taxes apply to different businesses, including:
Income tax
Provisional tax
• Known as Corporate Income Tax (CIT) and is payable by all businesses.
• Calculated on a business’s profit.
• CCs and companies pay income tax at a flat rate of 28 %
• Not a type of tax, but a method of paying income tax.
• Income tax is paid in at least two instalments, on estimated taxable-income.
• A final tax payment is made once financial statements are completed.
• Businesses, as well as individuals who earn income other than salaries, for example rent income or business income (sole proprietorships and partnerships), pay provisional tax.

FORMS OF OWNERSHIP
FACTORS THAT CONTRIBUTE TO THE SUCCESS OF FAILURE OF A BUSINESS
2. Taxation

Different taxes apply to different businesses, including:
Value
Added
Tax (VAT)
Turnover tax
• Any business can register for VAT, including sole proprietorships and partnerships.
• Vat-registration is compulsory if a business’s turnover exceeds R1 million in an y consecutive twelve-month period.
• Vat payable = Output-VAT – Input-VAT.
• Input-VAT is paid to suppliers when goods are bought.
• Output-VAT is received when goods are sold.
• A simplified tax-system for micro businesses, including sole proprietorships, partnership, CCs and companies with an annual turnover of less than R1 million.
• Replaces income tax, VAT, provisional tax, capital gains tax and dividend tax.
• Calculated on a business’s turnover (sales).

FORMS OF OWNERSHIP
FACTORS THAT CONTRIBUTE TO THE SUCCESS OF FAILURE OF A BUSINESS
2. Taxation

Different taxes apply to different businesses, including:
Capital Gains
Tax
• Forms part of income tax.
• Applies when assets are sold.
Dividend tax • Charged at 15 %. Dividends are paid to shareholders and members.

FORMS OF OWNERSHIP
FACTORS THAT CONTRIBUTE TO THE SUCCESS OF FAILURE OF A BUSINESS:
3. Management

Sole proprietorships and partnerships are owned and managed by the owners and partners.
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Close Corporations are owned and managed by members.
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Private and public companies are owned by shareholders and managed by directors.
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The board of directors are elected by shareholders.

FORMS OF OWNERSHIP
FACTORS THAT CONTRIBUTE TO THE SUCCESS OF FAILURE OF A BUSINESS:
4. Capital
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Capital requirements are determined by the size of a business and the product the business manufactures.
Only public companies are allowed to raise capital by selling shares to the public on a stock-exchange.
The capital of all other forms of ownerships id limited to the contribution of:
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Sole trader: owner
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Partnership: partners
Close Corporation: members
Private companies: shareholders

FORMS OF OWNERSHIP
FACTORS THAT CONTRIBUTE TO THE SUCCESS OF FAILURE OF A BUSINESS:
5. Division of profits
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The profit of a business belongs to the owner of the business.
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Business owners then decide when to take profit from the business, and when to leave the profit in the business for growth and expansion.
Business owners should guard against taking too much money form the business as this can impact negatively on business operations.
The profit of the CC belongs to the CC.
It is distributed to the members in terms of the
CC’s association agreement.

FORMS OF OWNERSHIP
FACTORS THAT CONTRIBUTE TO THE SUCCESS OF FAILURE OF A BUSINESS:
5. Division of profits
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Members must agree on when profit will be distributed.
Profit of companies is distributed to shareholders according to the number and value of their shares.
Particulars of dividend payments (e.g. the date) is given in a company’s Memorandum of
Incorporation (MoI).
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Dividends are usually declared by directors when a company’s financial statements are announced.
This means that profit is shared among shareholders.

FORMS OF OWNERSHIP
FACTORS THAT CONTRIBUTE TO THE SUCCESS OF FAILURE OF A BUSINESS:
6. Legislation
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Businesses must abide by the laws of a country.
Some laws have been written specifically for businesses, for example the Employment Equity Act.
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Companies are governed by The Companies Act
(Act No. 71 of 2008).
The Act provides meaningful information regarding the types of companies and the way companies are formed and operated.
No laws have been formulated for sole proprietorships or partnerships or partnerships in particular.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
1. Capacity
Capacity
Success
Failure
• Owners of sole proprietorships are actively involved in producing and delivering goods and services.
• Owners often have good relations with clients to ensure ongoing orders and income.
• Sole proprietorships are usually small businesses with limited infrastructure.
• Limited capacity to raise capital.
• Limited capacity to produce and deliver large orders.
• Potential loss of income due to inability to produce on a large scale.
• Limited potential to expand.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
1. Capacity
Capacity
Success
Failure
• Partners are actively involved in the production and delivery of goods and services.
• Partners often have good relations with clients to ensure ongoing orders and income.
• Partnerships are usually smaller businesses with limited infrastructure.
• Greater capacity to raise capital than sole traders, but capacity to raise capital is still limited.
• Limited capacity to produce and deliver large orders due to lack of infrastructure, usually found in smaller businesses.
• Potential loss of income due to inability to produce on a large scale.
• Limited potential to expand.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
1. Capacity
Capacity
Success
Failure
• Members are actively involved in producing and delivering goods and services.
• Members often have good relations with clients to ensure ongoing orders and income.
• Close Corporations are usually small businesses with limited infrastructure.
• Limited capacity to raise capital.
• Limited capacity to produce and deliver large orders due to lack of infrastructure, usually found in smaller businesses.
• Potential loss of income due to inability to produce on a large scale.
• Limited potential to expand.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
1. Capacity
Capacity
Success
Failure
• The owners of small private companies are actively involved in running the business and producing goods and services.
• Large private companies employ many people and have a greater capacity to produce on a large scale.
• Large private companies have a greater capacity to raise capital than smaller businesses.
• Some private companies are very small (a single owner), while other private companies are large with many employees.
• Small private companies have a limited capacity to raise capital and to produce on a large scale.
• Small private companies face a potential loss of income due to their inability to produce on a large scale.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
1. Capacity
Capacity
Success
Failure
• Usually large businesses with infrastructure and employees to carry out large orders.
• Public companies usually have the ability to produce and to expand.
• Very costly to maintain infrastructure and large employee base.
• Large amounts of capital required to start a public company.
• Large business operations required sufficient cash flow.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
2. Taxation
Taxation
Success
Failure
• Low earners pay lower tax-rates.
• Small sole proprietorships have the option of paying turnover tax, which is a simplified tax system and requires less paperwork.
• he owners of sole proprietorships pay tax in their personal capacities.
• High earners are subject to high tax-rates.
• Owners must keep money aside to pay tax – this can put a sole trader’s cash flow under pressure.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
2. Taxation
Taxation
Success
Failure
• Low earners pay lower tax-rates.
• Small partnerships have the option of paying turnover tax, which is a simplified tax system and requires less paperwork.
• The business does not pay tax – partners pay tax in their personal capacities.
• High earners are subject to high tax-rates.
• Partners must keep money aside to pay tax – this can put a partnership’s cash flow under pressure.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
2. Taxation
Taxation
Success
Failure
• Input-VAT is claimed back from SARS.
• Small CCs have the option of paying turnover tax, which is a simplified tax system and requires less paperwork.
• Tax-rate is high – this puts a business’s cash flow under pressure.
• A CC pays income tax at 28 % of the taxable income.
• The profit (after tax) is distributed to members – the CC then pays dividend tax of 15 % on the money distributed to members.
• VAT registered CCs also pay VAT.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
2. Taxation
Taxation
Success
Failure
• Input-VAT is claimed back from SARS.
• Tax rate is high – this can put a company’s cash flow under pressure.
• Companies pay tax at 28 % of taxable income.
• The profit (after tax) is distributed to shareholders – this is called dividends.
• Companies pay dividend tax of 15 % on the dividends distributed to shareholders.
• VAT-registered companies also pay VAT

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
2. Taxation
Taxation
Success
Failure
• Input-VAT is claimed back from SARS.
• Tax rate is high – this can put a company’s cash flow under pressure.
• Companies pay tax at 28 % of taxable income.
• The profit (after tax) is distributed to shareholders – this is called dividends.
• Companies pay dividend tax of 15 % on the dividends distributed to shareholders.
• VAT-registered companies also pay VAT.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
3. Management
Management
Success
Failure
• Owned and managed by the owner.
• Owner has full control over the way in which the business is managed.
• The owner is responsible for generating his/her own income – this generally motivates owners to work hard.
• Owners have only their own management experience to rely on.
• Owners of sole proprietorships often have great innovative skills, but many lack management skills.
• Example: a hairdresser knows a lot about styling hair, but might not know anything about the financial or managerial side of a business.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
3. Management
Management
Success
Failure
• Owned and managed by partners.
• Partners are actively involved in managing the partnership.
• Partners have access to expertise of other partners when tough decisions have to be made.
• Partners are responsible for generating their own income
– this generally motivates people to work hard.
• Decision making can be time consuming as all partners have to be in agreement.
• Some tasks may be neglected, because a partner might think that one of the other partners will do the task.
• Partners may disagree on how to run the business – this can lead to tension between partners.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
3. Management
Management
Success
Failure
• No separation between ownership and management – members are also managers.
• Members are actively involved in managing the partnership.
• Members have access to expertise of other members when tough decisions have to be made.
• Members are responsible for generating their own income – this generally motivates people to work hard.
• Decision making can be time consuming as all members have to be in agreement.
• Members may disagree on how to run the business – this may lead to tension between members.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
3. Management
Management
Success
Failure
• Although shareholders own the company, they are not actively involved in running the company.
• Hence, ownership and management are separated.
• Owned by shareholders and managed by at least one director.
• Directors are usually highly skilled individuals who know how to run a business.
• Directors are accountable to shareholders.
• Shareholders have the power to elect suitable directors, but not all shareholders exercise their voting rights.
• Directors may sometimes act in their own best interests, not in the company’s best interest.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
3. Management
Management
Success
Failure
• Owned by shareholders, yet shareholders are not actively involved in running the company.
• Hence, ownership and management are separated.
• Owned by shareholders and managed by at least three directors.
• Directors are usually highly skilled individuals who know how to run a business.
• Directors are accountable to shareholders.
• Shareholders have the power to elect suitable directors but not all shareholders exercise their voting rights.
• Directors may sometimes act in their own best interests, not in the company’s best interests.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
4. Capital
Capital
Success
Failure
Success
Failure
• Capital is limited – this motivates an owner to use money carefully.
• Limited to the amount that the owner can contribute.
• Limits growth and expansion.
• Difficult to gain access to credit, but the owner can apply for a loan, if necessary.
• Easier access to credit than a sole proprietor, because there are more partners.
• Capital can be added or withdrawn at any time – as long as all partners give their content.
• Limited to the amount that the partners can contribute.
• Difficult to gain access to credit, but partners can apply for a loan, if necessary.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
4. Capital
Capital
Success
Failure
• Close Corporations can be financially strong, because up to ten members can contribute to the capital of a
CC.
• Each member contributes to the capital of the CC.
• Contributions may be increased or decreased at any time, as long as all members agree.
• Access to capital increases if more members are invited to join the CC – as long as membership does not exceed ten members.
• Limited to the amount that 1 – 10 members can contribute.
• Difficult to gain access to credit, but members can apply for a loan, if necessary.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
4. Capital
Capital
Success
Failure
• Even though shares are not freely transferable, large private companies can raise considerable amounts of capital.
• Private companies have more privacy than public companies, because private companies generally have fewer shareholders – and shareholders are entitled to a company’s financial statements.
• Small private companies have limited access to capital
– this may limit growth and expansion.
• The shares of a private company are not freely transferable.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
4. Capital
Capital
Success • The shares of a public company are freely transferable.
• Anyone can own shares in a public company, as long as the company is listed.
• Shares can be issued if a public company needs to raise capital.
• Large amounts of capital can be raised to start large business undertakings.
• Shareholders of listed public companies can trade their shares on the JSE.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
4. Capital
Capital
Failure • Profit is distributed to shareholders – the more shareholders there are, the less profit is left for the people who own the company.
• Shareholders are entitled to see a company’s financial statements – this impacts on the privacy of the company.
• Listed companies have extensive corporate governance duties.
• Growth is limited if sufficient capital cannot be raised

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
5. Division of profits
Division of profits
Success
Failure
• All profit belongs to the owner.
• The owner can use profit to grow the business.
• Business owners must be careful not to spend too much profit – there should always be enough money available go pay tax and to make sure the business can operate efficiently.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
5. Division of profits
Division of profits
Success
Failure
• Profit belongs to the partners.
• The profit of the partnership is divided proportionally, according to the partnership agreement.
• Partners can use profit to expand the business.
• Partners must be careful not to spend too much profit – there should always be enough money available to pay tax and to make sure the business can operate efficiently.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS :
5. Division of profits
Division of profits
Success
Failure
• Profit can be kept in the CC to grow the CC.
• Members decide when profit is distributed.
• Members decide on the portion of the profit that will be distributed.
• Members must be careful not to spend too much profit
– there should always be enough money available to pay tax and to make sure the business can operate efficiently.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
5. Division of profits
Division of profits
Success
Failure
• The value of shares increases if a company performs well.
• Financial statements and the amount of profit can be kept private.
• The value of shares decreases if a company does not perform well.
• Process of paying dividends to shareholders is time consuming.
• Difficult to sell shares if the company is not performing well, because private companies’ shares may not be sold on the JSE.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
5. Division of profits
Division of profits
Success
Failure
• The value of shares increases if a company performs well.
• Investors are keen to invest in companies that do well.
• The value of shares decreases if a company does not perform well.
• Shareholders may sell their shares if dividend payments are low.
• Process of paying dividends to shareholders is time consuming.
• Financial statements must be drawn up.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
6. Legislation
Legislation
Success
Failure
Success
Failure
• Easy and inexpensive to start.
• No regulatory requirements regarding the name of the business.
• Not compulsory to have financial statements audited.
• Businesses can only apply for loans if they have financial statements.
• Easy and inexpensive to start.
• No regulatory requirements regarding the name of the business.
• Not compulsory to have financial statements audited.
• Businesses can only apply for loans if they have financial statements.
• Oral agreements between partners can cause conflict between partners.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
6. Legislation
Legislation
Success
Failure
• Existing Close Corporations may continue to exist indefinitely, or until their members decide to convert to companies.
• Not compulsory to have financial statements audited.
• Businesses can only apply for loans if they have financial statements.
• The new Companies Act (Act No 71 of 2008) does not make provision for the formation of new Close
Corporations.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
6. Legislation
Legislation
Success
Failure
• Not compulsory to have financial statements audited.
• Relatively easy to start a private company.
• Businesses can only apply for loans if they have financial statements.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF
A BUSINESS:
6. Legislation
Legislation
Success
Failure
• Strict regulatory requirements aim, amongst others, to protect shareholders.
• Listed companies must adhere to requirements of King III code.
• Shareholders enjoy limited liability for the debt of the company.
• There are regulatory requirements relating to public companies – especially if a public company is listed.
• Complicated process to start a public company.

FORMS OF OWNERSHIP
FORMS OF OWNERSHIP AND THEIR IMPACT ON THE SUCCESS OR FAILURE OF A
BUSINESS:
6. Legislation
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The new Companies Act (Act No. 71 of 2008) replaced the old
Companies Act (No. 61 of 1973) in 2011.
The new Companies Act does not replace the Close
Corporations Act, (No. 69 of 1984), but it does not make provision for the formation of new Close Corporations.
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Some of the main differences between the old and the new
Companies Act:

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The new Companies Act does not make provision for the formation of new Close Corporations.
The Memorandum of Association and Articles of Association have been replaced with a single document: The Memorandum of
Incorporation (MoI).
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A new scale has been introduced to determine whether private companies and existing CCs will be audited.
More attention is given to corporate governance.