ADVANTAGES AND DISADVANTAGES OF THE FORMS OF OWNERSHIP

ADVANTAGES AND DISADVANTAGES OF THE FORMS OF OWNERSHIP FORM OF OWNERSHIP Sole 1 Owner Partnership Minimum of 2 Partners, Maximum of 20 ADVANTAGES 1. Simple to form i.e. No registration. 2. Can have an idea and start trading immediately. 3. Ideas and changes can be implemented immediately no red tape 4. Don t have to register for or charge VAT (Unless turnover exceeds R 1000 000) 5. Could be a cash only Cash is King 6. The Sole trader is able to offer his/her clients a specialised service 7. Custom products can be designed for a smaller customer base 8. Can run from anywhere with limited resources and space within the bylaws of the town or city. 9. All profit belongs to the owner 1. Simple to form and there are no legalities 2. More than one person bringing resources and expertise to the table 3. Shared responsibilities in running the 4. Share profit and losses 5. No need to draw up a Partnership Agreement but it is better to have one DISADVANTAGES 1. The Business is not a legal entity (A legal person), therefore the owner is responsible for all the debts incurred for i.e. Unlimited Liability 2. Financing is difficult to obtain 3. High Risk 4. Very demanding for one person to run the 5. Monthly income can vary considerably i.e. Feast or Famine 6. The Sole Trader must manage his money very well to provide for the leaner months 7. The Sole Trader may not be able to compete with larger es that benefit from wholesale prices, large advertising budgets etc. 8. The Sole trader may not have all the skills and knowledge needed for every aspect of 9. Some companies will not trade with a that is not registered 10. The sole trader is taxed personally 11. There is no continuity i.e. when the owner dies, ceases to exist 12. The owner may also not declare all income generated to SARS which is Fraud 13. All losses suffered by the owner 14. The owner is taxed personally 1. The Business is not a legal entity therefore the partners share unlimited liability 2. If there are more than 2 people then the partnership may still exist between the remaining partners 3. Can be open to fraud i.e. Partners not declaring personal income from the partnership to SARS (Cash Transactions cannot be proven) 4. The owners are taxed personally. 5. One partner may work harder i.e. unfair distribution of labour 6. If a Partnership dissolves, and there isn t an agreement, solving disputes are more difficult. Legal council may be sought 7. If the partnership is also a friendship, this too may also dissolve 1

FORM OF OWNERSHIP Close Corporation CC 1 10 Members CC Formed by drawing up a Founding Statement. Members hold interest. Members interest is shown as a % totalling 100% ADVANTAGES 1. Limited Liability 2. Legal Entity ( Business is held Liable for Debts) 3. CC s Registered prior to the New Companies Act may still trade 4. CC s may still be bought 5. Annual General Meeting (AGM) not required 6. No Audit required 7. Continuity New Founding Statement must be drawn up 8. Can buy a Shelf CC ( Pre registered CC s that never conducted ) to save time and money 9. Raising Capital is easier than a Sole Proprietor or Partnership DISADVANTAGES 1. New CC s are no longer registered 2. Annual renewal of Registration with CIPC required 3. Members are restricted to 10 4. Shelf CC s are scarce 5. The CC is taxed the same as companies (On Profit) ACTIVITY 1 Paste cards/ advertisments of the following forms of ownership: 1) Sole Trader 2) Partnership 3) Close Corporation Resources: Yellow pages, swop cards with your calssmates. 2

ACTIVITY 2 Tabulate 5 advantages and disadvantages of a Sole Proprietor. ACTIVITY 2 Tabulate 5 advantages and disadvantages of a Partnership. ACTIVITY 3 Tabulate 5 advantages and disadvantages of a Close Corporation. 3

FORM OF OWNERSHIP Private Company PTY (Ltd) Formed by drawing up a MOI and Completing the Notice of Incorporation and Registering with the CIPC Unlimited number of Shareholders. 1 or more Directors. 1 50 Shareholders hold shares. Public Company (Ltd) Listed on the Johannesburg Stock Exchange - JSE Minimum of 3 directors Unlimited Shareholders ACTIVITY 4 ADVANTAGES 1. Limited Liability for Shareholders 2. Directors can be liable if they are knowingly part of running recklessly or fraudulently. 3. Continuity 4. Transferring of shares from one shareholder to another is easy 5. Raising Capital is easier 6. Management can be more efficient 7. Can be adapted to small and large es 8. Annual Statement do not have to be filed with the CIPC i.e. the financial position of the Company is not public knowledge 9. Certain expenses can be deducted as expenses e.g. Travel 10. Increased Credibility with customers, suppliers and Institutions 1. Limited Liability of shareholders 2. Access to Public funding by selling shares 3. Shares can be used as Currency for Acquisition (Buying Assets) 4. Giving shares to key employees can help retain talent. 5. Listed Companies increase their corporate reputation and public profile which enhances the brand name. 6. Company growth attracts Institutional and Foreign Investors 7. Being Listed can Facilitate Broad Based Black Economic Empowerment deals (BBBEE) DISADVANTAGES 1. Many legal requirements (MOI and Notice of Incorporation) 2. An AGM must be held 3. Company must be audited 4. Costs involved in registration 5. At least 1 Director required 6. Minimum of 2 shareholders required for a meeting 7. Shares may not be offered to the public to raise funds 8. Cannot be registered on the stock exchange - JCE 9. Number of Shareholders limited 10. Taxed on Profit 1. Loss of Control due to Stock Market Rules 2. There are Market expectations so you cannot disappoint shareholders. (Increased Accountability) 3. Founder Shares are diluted as new shares are issued to raise capital. 4. Market Volatility Share prices rise and fall due to reasons unconnected to the company e.g. Global issues whether real or perceived, change in government, strikes, disasters etc. 5. Ongoing costs in maintaining the Listing 6. Have to appoint an Investment Banker to help with all the legal requirements and to create hype so as to attract investors. 7. Listing a Company can take 3 months 2 years 8. Loss of Privacy due to media interest 9. Annual Statements are Public Knowledge (This could be an Advantage if the Company is performing well) 10. Taxed on Profit Paste adverts/ cards of Private and Public Companies 4

ACTIVITY 5 Tabulate 5 dvantages of a Public and Private company. LIBERTY LIFE ACTIVITY 6 Tabulate 5 Disadvantages of a Public and Private company. 5

ACTIVITY 7 Complete the Table FORMS OF OWNERSHIP 1 2 3 Sole Proprietor Partnership Close Corporation Registration Cost of starting Ease of starting Number of owners strength - Ability to raise funding Profit Distribution responsibility of owner for debts Decision making in Continuity of the Taxation 6

ACTIVITY 8 Complete the Table Registration Cost of starting Ease of starting Number of owners strength - Ability to raise funding Profit Distribution responsibility of owner for debts Decision making in Continuity of the Taxation 4 FORMS OF OWNERSHIP 5 Private Company Pty (Ltd) Public Company (Ltd) 7