FORMS OF OWNERSHIP CHAPTER 17

PAPER 2

BUSINESS STUDIES
GRADE 12
TERM 4
CHAPTER 17
NOTES ON FORMS OF OWNERSHIP
CRITERIA THAT CONTRIBUTE TO SUCCESS AND/OR FAILURE OF
EACH FORM OF OWNERSHIP
REVISED

TABLE OF CONTENTS
TOPICS PAGES
Exam guidelines for forms of ownership 2
Terms and definitions 3
Criteria for success and/or failure of a sole trader 4-5
Criteria for success and/or failure of a partnership 5-6
Criteria for success and/or failure of a private company 6-7
Criteria for and/or failure of a public company 8-9
Criteria for success and/or failure of a personal 9-10
liability company
Criteria for success and/or failure of a non-profit 11
company This chapter consists of 11 pages
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CONTENT DETAILS FOR TEACHING, LEARNING AND ASSESSMENT

PURPOSES Learners must be able to:
 Explain/Discuss how the following criteria could contribute to the success
and/or failure of each form of ownership:

 Capacity: refers to the ability/potential of management to start and

operate a business as planned.
 Tax implications: The tax requirements of each form of ownership
determine the impact of taxation on business success/failure.
 Management: Ownership impacts on management functions which
determine the success/failure of the business.
 Capital: refers to the ability to obtain capital from various sources (e.g.
own/borrowed capital). The amount of capital that can be sourced will also
impact on business success/failure.
 Division of profits: refers to how profit is divided between
owner(s)/shareholders/ investors.
 Legislation/Legal requirements for establishment/starting a business
impact on the establishment costs and time before a business can legally
do business.
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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 shareholders
Incorporation (MOI) 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 decisions,
proprietor 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 person.
company
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 behalf.
Partnership A document that contains exhaustive provisions with regards to the matters
Article 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 stating
Meeting (AGM) 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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Criteria that can contribute to success or failure of each form of

ownership

1.1 Criteria that contribute to the success and/or failure of a sole

trader
Factor Success AND/OR Failure
Capacity -Easy to control since it is a -Difficult to continue and grow long
small business term
-Difficult to get good, well-trained
staff as they are expensive
-Owner has to manage and carry out
all business functions
Management -One owner so there are no -Owner has to do all the
disagreements. administration, management and
-Can make quick decisions decision-making in the business.
without having to consult others. -Owners has to rely on own
decisions and could make incorrect
ones.
Taxation -Owner only taxed on profits in -If profits get too big may end up
personal capacity. paying high tax in personal capacity.
-Depending on how much -Failure by the owner to comply with
income the owner earns, his/her personal income tax regulations
tax rate may be lower than the could lead to substantial financial
company tax rate penalties imposed by SARS.
-If the owner earns below a
certain threshold amount per
year, no income tax is payable
and the business’s profits are
thus not taxed.
Capital -Capital can be carefully spent -Profits may not be large enough for
and managed expansion.
-The owner may be able to -Cannot appoint people with large
borrow money from a financial salaries
institution, especially if he/she -Owner responsible for any capital
has assets that can be used as borrowed.
surety for a loan.
Division of profits -Owner receives all profits from -Owner needs to budget carefully so
the business which can lead to that business debts are covered.
capital growth. -If the owner does not make a profit,
-The owner may use profit to the income and livelihood of the
expand the business. owner may be severely affected.
-The owner is personally liable for
the loss of the business.
-Profits may not cover all business
debts/Owner may decide not to
expand.
Legislation -It is easy/inexpensive to start. -Unlimited liability
-Unlimited liability may -Personal debts and business debts
encourage the owner to work are not separated.
harder to ensure the success of -Must comply with relevant municipal
the business. regulations or it could close down.
-There are limited regulatory -The owner is personally liable for
requirements regarding the the business debt; he/she may be
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name of the business. reluctant to take

-It is not compulsory to have -Business may only qualify for more
financial statements audited. loans if they are licenced/Loans are
not easily obtainable.

1.2 Criteria that contribute to the success and/or failure of a

partnership
Factor Success AND/OR Failure
Capacity Easy and inexpensive to start -In large partnership, the partners
-Shows potential for growth may struggle to agree on
because partners contribute business issues
skills. -The more partners in the
-Expansion is possible because partnership, the more difficult it is
more partners can join partnership. to control expenses and
-Could have a financial capacity to partners’ drawings.
benefit from good discounts for
bulk purchases
Management -Partners are actively involved in -Decision making can be time-
management and may use the consuming as all partners have to
ideas of other partners. be in agreement
-Not all partners need to be actively -Some management tasks may be
involved in management and would neglected, as one partner may
rather appoint competent leave it to others to complete
managers. -Partners may disagree on how to
-Partners have access to expertise run the business, which may lead
of other partners when difficult to tension between them
decisions have to be made -Partners are agents of the
partnership and bad management
decisions may be forced onto
other partners.
-Different personalities/opinions
could lead to conflict/
disagreements.
Taxation -Partnerships pay VAT only on -High-earning partners pay more
relevant products sold/services tax, which may discourage other
rendered which reduces tax partners from joining the
administration partnership.
-The partnership does not pay -Partners may withdraw more
income tax, only the partners in cash to reduce their tax burden
their personal capacities which may cause cash flow
problems for the partnership
Capital -Capital can be carefully spent and -Partners may not all have capital
managed. to put into business when needed.
-More than one partner contributing -Unequal inputs as some partners
to capital. put in expertise instead of cash
Division of -Partners share profits according to -Amount of work done may not be
profits their contributions. equal to the amount of profit that
each partner receives.
Legislation -Easy and cheap to establish, as -Unlimited liability/ partners are
partners must draw up jointly and severally liable for the
partnership agreement. debts of the business.
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-Partners are more motivated -If one partner dies or retires,

to make a success because of their the remaining partners need to
personal possessions are at risk. draw up a new agreement.
- No regulatory requirements -Oral agreements between
regarding the name of the business. partners can cause conflict
-Only subjected to the provisions of between partners.
the Income Tax Act as compared to -A partnership is not a legal
companies. entity and cannot sue or be sued.

1.3 Criteria that contribute to the success and/or failure of a

private company
Factor Success AND/OR Failure
Capacity -There is no limit to the -It cannot grow into a very large
number of shareholders, this business since it cannot invite the
may lead to expansion. public to buy shares.
Management Managed at least by one -Directors may not have a direct
competent highly skilled interest in the company, which can
director. hamper growth and profit
-The management of the maximization.
company can improve since -Directors' fees increase the
directors are accountable to company's expenses which
shareholders. reduces net profit.
-Shareholders can vote -Some shareholders may not
for/appoint the most capable exercise their voting rights
directors to manage resulting in choosing the wrong
their company person as a director.
-Large management structures
can result in decision-making
taking time.
-Directors may not be motivated to
work very hard because share-
holders decide on the directors'
remuneration.
Taxation -Can obtain tax rebates if they -Subject to double taxation e.g.
are involved in SCI projects. shareholders pay secondary tax
-Can obtain government this can have a negative impact to
tenders and renew their a company that is already
licenses if they do not evade financially struggling.
tax.
Capital -Large amount of capital can -It cannot grow into a very large
be raised since there is no business since it cannot invite the
limit on the number of public to buy shares.
shareholders. -Restrictions on transferability of
-The company can access shares may not attract financially
long term capital and strong investors.
therefore has good long term -Large amount of capital cannot
growth opportunities. be obtained as capital contribution
is only limited to private
shareholders.
-Even though shares are not
freely transferable, large
private companies can raise
considerable amount of
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capital. More capital can be

raised by issuing shares to
shareholders.
Division of profits -High profits and good returns -Shareholders may sell their
to shareholders indicate the shares when dividends are low,
success of a company, which resulting in a drop in share prices
increases the value of shares -Dividends are not always paid out
-Profits generated can be re- which may discourage new
invested to expand business investors.
operations
-Shareholders receive profits
according to the type and
number of their shares.
Legislation Procedures to form a private -Formation procedures are time
company have been simplified consuming/complicated/
by the new Companies Act 71 expensive, as many legal
of 2008 documents need to be
-Limited liability allows for prepared/submitted
greater risk taking, which may -High formation/establishment
lead to growth of the business expenses require large start-up
-Auditing of financial capital.
statements (if required), gives -Annual audit of financial
shareholders the assurance statements (if required) is costly
that the business is being -If a private company does not
properly managed and comply with legislation, its licence
supports raising additional maybe withdrawn by the
finance Companies and Intellectual
- There is no longer a limit on Property Commission (CIPC).
the number of shareholders in
a private company.
-A private company can
benefit from government
programmes if they comply
with the relevant legislation
-Personal liability of share-
holders does not affect the
company's assets
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1.4 Criteria that contribute to the success and/or failure of a

public company
Factor Success AND/OR Failure
Capacity -More people can join the -Large capacity of the company
company by issuing shares to can also lead to its downfall in that
the public. structures and processes may
become too costly.
-Very costly to maintain
infrastructure and large employee
base
Management -Managed at least by one -Directors may not have a direct
competent highly skilled interest in the company, which
director. can hamper growth and profit
-The management of the maximization
company can improve since -Large management structure can
directors are accountable to result in decision making taking
shareholders. time.
-Shareholders can vote -Directors' fees increase the
for/appoint the most capable company's expenses which
directors to manage reduces net profit
their company. -Management may open to legal
challenges if their reports do not
comply with King Code 111.
-Some shareholders may not
exercise their voting rights
resulting in choosing the wrong
person as a director.
-Directors may not be motivated
to work very hard because share-
holders decide on the directors'
remuneration
Taxation -Can obtain tax rebates if they -Subject to double taxation e.g.
are involved in SCI projects. shareholders pay secondary tax
-Can obtain government this can have a negative impact to
tenders and renew their a company that is already
licenses if they do not evade financially struggling
tax.
Capital -Can raise large amounts of -Growth is limited if sufficient
capital as shares/ debentures capital cannot be raised.
can be sold to the
-Large amounts of capital required
public/shareholders to start a public company.
-Share capital clause in the -Raising extra capital may be
Memorandum of Incorporation difficult if the economic climate is
(MOI) may be changed to unfavourable/Share prices change
issue more shares all the time and they may lose
-A public company’s shares value.
are listed on the JSE which -An increase in the number of
gives the company exposure shares issued may lead to more
to more potential investors. dividends paid out/less retained
income from company profits.
Division of profits High profits and good returns -Shareholders may sell their
to shareholders indicate the shares when dividends are low,
success of a company, which resulting in a drop in share prices
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increases the value of shares -Dividends are not always paid out
-Profits generated can be re- which may discourage new
invested to expand business investors.
operations
-Shareholders receive profits
according to the type and
number of their shares.
Legislation -The company and its owners -Formation procedures are time
(shareholders) are separate consuming/complicated/
entities, which expensive, as many legal
may encourage more people documents need to be
to join the company prepared/submitted
-Limited liability allows for -High formation/establishment
greater risk taking, which may expenses require large start-up
lead to growth of the business capital.

-Auditing of financial -Annual audit of financial

statements, gives statements is costly.
shareholders the assurance -If a public company does not
that the business is being comply with legislation, its licence
properly managed and maybe withdrawn by the
supports raising additional Companies and Intellectual
finance. Property Commission (CIPC).

1.5 Criteria that contribute to the success and/or failure of a

personal liability company
Factor Success AND/OR Failure
Capacity There is no limit to the -It cannot grow into a very large
number of shareholders, business since it cannot invite the
this may lead to expansion public to buy shares
Management -PLC is managed by a -Directors may not have a direct
competent board of directors interest in the company, which can
who may be experts in their hamper growth and profit
fields. maximization
-Quick decisions can be -PLC and its shareholders are
made even if there is only compelled to budget a larger
one director. amount for directors' remuneration
-Shareholders can vote to attract the best directors.
for/appoint the most capable -Directors' fees increase the
directors to manage their company's expenses which reduces
company. net profit
Taxation -Can obtain tax rebates if -Subject to double taxation e.g.
they are involved in SCI shareholders pay secondary tax this
projects. can have a negative impact to a
-Can obtain government company that is already financially
tenders and renew their struggling.
licenses if they do not evade
tax.
-PLC only pays tax after
business expenses have
been deducted.
-Companies and
shareholders are taxed
separately/double taxation.
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-The company pays tax at a

fixed rate which can be lower
than that of partnerships.
-Image of the business is
promoted and attracts
investment when companies
comply with tax
regulations/laws.
Capital -Capital can be increased by -It cannot grow into a very large
getting more shareholders. business since it cannot invite the
public to buy shares.
-Restrictions on transferability of
shares may not attract financially
strong investors.
-Large amount of capital cannot be
obtained as capital contribution is
only limited to private shareholders.
Division of profits -High profits and good -Shareholders may sell their shares
returns to shareholders when dividends are low, resulting in
indicate the success of a a drop in share prices
company, which increases -Dividends are not always paid out
the value of shares which may discourage new
Profits generated can be re- investors.
invested to expand business
operations.
Legislation -The company and its -Lengthy registration requirements
owners (shareholders) are may delay the actual operation of
separate entities, which the business and shareholders can
may encourage more people loose on profitable opportunities
to join the company -It is expensive to register this form
-Directors are forced (by the of ownership which increases
Act) to act responsibly and business expenses hence reducing
work harder towards the profit
success of the company to -The drafting of directors'
protect their personal assets performance contracts may be time
-Directors sign performance consuming, expensive and increase
contracts which will motivate costs
them to perform -Auditing is required only if the
professionally and ethically PLC meets the requisite tests for
-Rights and duties of solvency and liquidity, which leads
shareholders are stipulated in to extra auditing costs.
the Companies Act,
which minimises unethical
and corrupt behaviour
-May obtain government
tenders as the PLC is
properly registered in
compliance with the
Companies Act
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1.6 Criteria that contribute to the success and/or failure of a non-

profit company
Factor
Success AND/OR Failure
Capacity -Many donors may be willing to -Limited capacity as funds may be
donate NPC activities are for a difficult to raise.
good cause/ beneficial to the -May not attract investors due to its
community. nature as a NPC as they are not
-More shareholders may become profit driven
involved/join the company as they
contribute positively to society.
Management -A NPC may be well managed as -Large management structure can
it requires a minimum of three complicate/delay decisions.
directors. -Directors may mismanage business
-More directors may be appointed funds as they may not have a direct
to bring more skills/ideas/ interest in the NPC.
innovations/expertise to the NPC.
-The legally prescribed Directors are liable for any loss/
management structure ensures a damage/cost sustained by the
well-organised company company.
Directors may not have skills to
manage resources.
Taxation -May qualify for tax exemption -Required to pay income tax if
if certain criteria are met engaged in activities that are
-They may receive certain tax unrelated to their business purpose -
benefits/rebates when actively Must meet certain tax requirements
involved in community projects. to be exempted, e.g. operations
must be exclusively for charitable,
scientific or public safety purpose
Capital -Unlimited number of founders -Founders may contribute limited
may contribute more capital to the capital/may not contribute capital
company. which may not be sufficient for the
-More capital may be raised establishment/operation of the
through donations/ sponsorships company.
for operation -The company depends/relies on
/expansion. donations as their main source of
- It is easy to raise funds/capital, capital which may hamper its
as donors enjoy tax benefits. operation/expansion.
-NPC may struggle to raise enough
capital/funds if they fail to convince
donors/donations are misused.
Division of -The profits of the company are -May discourage potential investors
profits used finance other needs of the from investing in the company as
company. this is a non-profit company.
Legislation -The company and its owners -Formation procedures are time
(shareholders) are separate consuming/complicated/ expensive,
entities, which as many legal documents need to
may encourage more people to be prepared/submitted.
join the company
-Financial statements are audited
this may result to effective use of
resources.