FORMS OF

OWNERSHIP
Chapter 5
Important Terms
◦ Formation Procedure
According to law, some businesses need to be registered to operate; the more
procedures are required to do business, the higher the costs of running the business.
◦ Legal Persona
A registered business is considered a separate legal entity from its owner.
What does that mean?
Even if the original owner passes away, the business will continue to exist as a separate
entity.
The owner cannot be held liable for the debts of the business – only the assets of the
registered business can be used to repay debts.
As business, it pays a fixed tax rate (28%) – however, a non-registered business would
fall under personal income tax which is progressive (more income = higher tax)
Sole Trade
◦ Sole Trade refers to a business
that is owned by ONE PERSON
and that person does not register
the business as a separate legal
entity.
◦ There may be more than one
person working there, but only
one person is responsible for the
capital and all liabilities.
 Sole Trade
CHARACTERISTIC ADVANTAGE DISADVANTAGE
Formation Procedure No requirements – fast and low
cost
Lega Persona The owner is considered the
‘legal entity’ and must enter into
contracts with their name. This
means they carry all the risks.
Continuity of Existence The business cannot exist without
the owner.
Owner Liability The owner has unlimited liability.
Tax Implications Dependent on profit
If profit remains below R272 701 per annum the owner will pay only
25% tax on profits. Over this, however, and the tax rate can scale to
over 28% - which is more than the maximum for registered
businesses.
 Sole Trade
CHARACTERISTIC ADVANTAGE DISADVANTAGE
Capital Requirements If only a small amount of capital is required (enough to be lent or
subsidised by the owner) then it is not a problem; for larger
amounts than their personal capacity can maintain, a different
approach will be necessary.
Management and Control in the The owner can be more flexible Little to no outside input.
Hands of the Owner to capitalise on opportunities. Owner limited by their own
Lack of experience will quickly experience and knowledge.
be remedied in day-to-day
tasks.
Partnership
◦ A partnership is where two or more
people become joint owners of a
business.
◦ They share capital contributions, losses
and profits using a predetermined ratio.
◦ Not registered as a legal entity separate
from the owners.
◦ In a partnership, the partners often
enter into a partnership agreement
◦ It defines the terms and conditions agreed
upon by the partners either:
◦ Tacitly
◦ Verbally
◦ In writing
 Partnership
CHARACTERISTIC ADVANTAGE DISADVANTAGE
Formation Procedure No requirements – fast and low Without a legally binding
cost. agreement, any serious matters
A written agreement may be will need to be resolved in court.
present, but not required.
Lega Persona The owners are he ‘legal entity’
and must enter into contracts
with their name. This means they
carry all the risks.
Continuity of Existence The business cannot exist without
the owners.
Owner Liability The partners have unlimited
liability. If one partner get the
business in debt, they are both
liable.
Tax Implications Dependent on profit
If profit remains below R272 701 per annum the owner will pay only
 Partnership
CHARACTERISTIC ADVANTAGE DISADVANTAGE
Tax Implications Dependent on profit
If profit remains below R272 701 per annum the owner will pay only
25% tax on profits. Over this, however, and the tax rate can scale to
over 28% - which is more than the maximum for registered
businesses.
Capital Requirements More available capital as two or
more people’s capital can be
combined.
Management and Control Good employees can be More people need to be
retained by being made partner consulted before a decision is
More input can lead to better made. Can make it harder to
decisions capitalise on opportunities.
Division of labour makes running
the business easier.
Companies
◦ A legal entity incorporated in terms of Act 71 of 2008.
◦ This includes any company registered under pervious Companies Act (1973) and Close
Corporation (whether or not it has been converted into a company
◦ A company will also be registered with the Companies and Intellectual Property Commission.

◦ Companies Act
◦ Encourage entrepreneurship
◦ Promote the well-being of the South African economy
◦ To simplify the process of registering and owning a company
◦ To ensure the rights and obligations of shareholders and directors are aligned
◦ To ensure companies are managed responsibly
◦ To ensure non-profits are established and managed effectively and with accountability
Companies - Types
Companies
Act 71 of
2008

Profit Non-Profit

State Personal
Private Public
Owned Liability
Private vs. Public
Private
◦ May not be state owned.
◦ Memorandum of Incorporation (MOI) has to specify that its shares are not available to
the public.
Public
◦ Allowed to list on the Johannesburg Stock Exchange (JSE)
◦ Shares can be sold and traded to generate capital.

NOTE: Even though a public company can list on the JSE, does not mean they will be
allowed to
Companies Act No. 71 of 2008
The companies act sets out a number of prescriptions/rules for registering a company.
These rules are meant to ensure safe and fair business practice throughout the country.

Name of the Company

◦ A company may reserve a name for the business as long as it:
◦ Is not similar to the name of another business.
◦ Is undesirable or hateful to any group in society.
◦ May not be misleading or pretend to be associated with a person, group, business or government it is
not associated with.
◦ The name of the company must end in the following words or letters:
◦ Proprietary Limited (Pty Ltd.) – private company
◦ Limited (Ltd.) – public company
◦ Incorporated (Inc.) – personal liability company
◦ SOC Ltd. – state-owned company
◦ NPC – for a not-for-profit company
Companies Act No. 71 of 2008
Formation Procedure
◦ To register a company a person must:
◦ Pay the required fee
◦ Complete a Notice of Incorporation
◦ Register Memorandum of Incorporation (MOI)
The MOI is a document that:
◦ Stipulates the different shares that will be sold (if any)
◦ The rights, duties and responsibilities of shareholders
◦ Describes the duties, responsibilities and liabilities of the directors
◦ May impose stricter requirements for directors than the Companies Act (but may not contravene it)
◦ May only be changed by a special resolution accepted by all shareholders.
◦ The minimum number of shareholders is one (for public and private)
◦ A public company must have at least three directors; private companies only need one.
◦ A director may also be a shareholder (the two are not mutually exclusive)
◦ A soon as the Registration Certificate is issued, the company becomes a separate legal entity.
 Companies Act No. 71 of 2008
Prospectus
◦ A written invitation to the public to buy shares or securities in the
company.
The King Report on Corporate Governance
◦ The front page must include proof of registration. is a booklet of guidelines for the
governance structures and operation of
◦ Must be signed and dated by all directors. companies in South Africa. It is issued by the
◦ It should contain general information about the company (history, King Committee on Corporate
type of business, financial history, etc.) Governance. Three reports were issued in
1994 (King I), 2002 (King II), and 2009 (King III)
◦ Must contain a statement to which degree the company complies and a fourth revision (King IV) in 2016.
with King Report and Code Compliance with the King Reports is a
requirement for companies listed on the
◦ The prospectus’ main aim is to generate capital and therefore must Johannesburg Stock Exchange.
contain:
◦ The purchase price (of shares)
◦ Address of the business
◦ How the price of shares is to be paid (cash, etc.)
◦ Procedure for if the business is taken over
Companies Act No. 71 of 2008
Meetings
◦ Shareholders should have the choice to attend meetings in person, via proxy or
electronically
◦ Public companies must give 15 days notice of a meetings; Private companies have to
give 10 days notice
◦ Any resolutions require a quorum (25% of the shares) be present for voting.
Companies Act No. 71 of 2008
Duties of Directors
◦ In addition to additional duties places on directors by the MOI, they must also adhere
to all Common Law principles
◦ Have a duty to act in the best interest of the company – not to act in any way that will
either benefit themselves only or disadvantage the business
◦ Should act in good faith at all times
◦ Obliged to disclose personal or financial interests to prevent conflicts of interest if there
is suspicion that a director’s actions were made for their own benefit
Companies Act No. 71 of 2008
Financial Obligations
◦ All companies must prepare annual financial statements (AFS) that meet the
requirements of the International Financial Reporting Standards (IFRS) and file these
with the Companies and Intellectual Property Commission (CIPC)
◦ Public companies must have their AFS audited by a third party.
◦ In addition, public companies must:
◦ Appoint a company secretary to make directors aware of legislation, give guidance and
ensure that all necessary documents are filed with the CIPC
◦ Appoint an internal audit committee
◦ Appoint and external auditor (third party)
◦ Public companies must also meet solvency and liquidity tests before dividends may be
announced. This entails:
◦ That assets exceed liabilities (solvency test)
◦ If the company will be able to settle its debts within the next 12 months. (liquidity test)
 Companies
CHARACTERISTIC ADVANTAGE DISADVANTAGE
Formation Procedure Complicated and involved.
Costs related to registration.
Lega Persona The business is the legal entity.
Continuity of Existence The business has continuity. It
keeps existing even without the
owners.
Owner Liability Limited liability. Owners will only
lose their capital investment if
the business becomes insolvent.
Tax Implications Dependent on profit
If profit remains below R272 701 per annum private tax rate will be
less than the base 28% for businesses – which is a disadvantage.
Over this amount and the tax rate will stablise at 28%.
 Companies
CHARACTERISTIC ADVANTAGE DISADVANTAGE
Capital Requirements Easier to generate capital More initial capital required to
through shareholders and for registration and
business-related loans. administrative duties.
Management and Control in the Managed by directors.
Hands of the Owner In a small company owners will be directors as well.
When registered as a public company there has be separation of
ownership and management. It is better to appoint people with
experience, knowledge and skills in business to be directors as they
will be an advantage to the business.