Forms of Ownership: Criteria for Success and/or Failure (Grade 12 NSC Matric Business Studies): Revision Notes

Contribution of Each Form of Ownership to Success/Failure

Understanding how different forms of business ownership contribute to success or failure is essential for making informed decisions about business structure. Each ownership form has unique characteristics that affect five key criteria: taxation, management, capital, division of profits, and legislation.

Sole trader

A sole trader is the simplest form of business ownership where a single person owns and operates the business. This means the business and owner are legally the same entity, with no separation between personal and business assets.

Key characteristics of sole traders

• Simplest and oldest form of business ownership
• Owned and managed by one person only
• Easy to establish with no legal formalities required
• No legal requirements regarding business name
• Owner has unlimited liability for all business debts
• Limited potential for expansion due to lack of continuity
• Business has no legal personality separate from the owner
• Profit is added to the owner's personal taxable income

Advantages and disadvantages of sole traders

Advantages:

• Easy to start or end the business
• Requires little starting capital
• Few legal formalities needed
• Owner makes all decisions independently
• Owner keeps all profits
• Simple management structure
• Assets belong entirely to the owner

Disadvantages:

• Owner provides all capital needed
• Business is not a separate legal entity with no continuity
• Owner may lack sufficient knowledge or experience
• Owner has unlimited personal liability for debts and losses
• Business growth can be restricted by lack of capital

How criteria contribute to sole trader success or failure

Criteria	Success Factors	Failure Factors
Taxation	• Owner only taxed on profits personally • Income taxed at lower rate than company tax • No income tax if earnings below threshold	• Large profits may result in higher personal tax • Non-compliance with tax regulations leads to SARS penalties
Management	• Quick decision-making without consultation • Owner can apply creativity to important decisions	• Owner must handle all administration alone • Relies solely on personal experience and skills
Capital	• Capital carefully managed by owner • May secure additional capital if creditworthy	• Profits may be insufficient for expansion • Cannot easily employ qualified staff • Owner responsible for borrowed capital
Division of profits	• Owner receives all business profits • Profits can lead to capital growth and expansion	• Profits may not cover all business debts • Owner's income depends entirely on business success
Legislation	• Easy and inexpensive to start • Limited regulatory requirements • Unlimited liability may motivate success	• Owner personally liable for all losses • Must comply with municipal regulations • Business has no continuity or legal personality

Partnership

A partnership occurs when two or more people join together to run a business, pooling their resources and sharing in both the profits and losses. Partners combine their skills, expertise, and capital to achieve common business goals.

Key characteristics of partnerships

• No legal formalities required to start, only a written partnership agreement
• No legal requirements regarding the business name
• Partners combine capital and may borrow additional funds
• Partners have unlimited liability and are jointly responsible for debts
• Profits shared according to partnership agreement
• Optional to audit financial statements
• Partners share responsibilities and decision-making
• Partnership pays no income tax - only partners pay personal tax
• Partnership has no legal personality and therefore no continuity

Advantages and disadvantages of partnerships

Advantages:

• Few legal requirements to establish
• More capital available through pooled resources
• Partnerships not required to conduct audits
• Partners combine knowledge and skills for better decisions
• Workload and responsibility shared between partners
• Partners only pay tax in personal capacity
• Partners have personal interest in business success

Disadvantages:

• Partners have unlimited liability and can lose personal assets
• Different personalities and opinions can lead to conflicts
• Lack of continuity - partnership ends if partner leaves
• Partners might not contribute money and assets equally
• Lack of capital and cash flow problems possible
• Each partner legally responsible for joint liability
• Business can be affected by one partner's poor decisions

How criteria contribute to partnership success or failure

Criteria	Success Factors	Failure Factors
Taxation	• Partnership doesn't pay income tax • Only partners pay personal tax	• High-earning partners pay more tax • Partners may withdraw cash to reduce tax burden
Management	• Partners actively involved in management • Can use ideas of other partners • Partners can be creative and access expertise	• Decision-making can be time-consuming • Partners must do all administration • Disagreements may lead to tension • Poor decisions by one partner affect all
Capital	• More capital available from multiple partners • Partners careful with spending and management	• Partners may not all have equal capital • Some may contribute expertise instead of cash
Division of profits	• Profits shared according to contributions • Written agreement helps limit misunderstanding	• Work done may not equal profit received • Can lead to dissatisfaction among partners
Legislation	• Easy and cheap to establish with partnership agreement • Partners motivated to succeed due to personal risk • No regulatory requirements for business name • Unlimited liability may motivate success	• Partners jointly liable for all debts • If partner dies/retires, new agreement needed • Oral agreements can cause conflicts • Not a legal entity - partners can sue each other

Close corporation

A close corporation (CC) is a business entity with separate legal personality but operates with the legal capacity of a natural person. Close corporations were popular in South Africa but no new CCs can be formed since 2008, though existing ones continue operating.

Key characteristics of close corporations

• Business name must end with "CC"
• Can have minimum of one and maximum of ten members
• Members are not partners but have shares and interest in the CC
• All members involved in management participation
• Each member contributes assets, expertise, or services
• Members have limited liability except in specific circumstances
• CC has its own legal personality and unlimited continuity
• Auditing books is optional - only needs accounting officer
• Member interest transfers must be approved by all other members
• Profits shared proportionally to member's interest in CC
• CC pays tax on income earned by the business

Advantages and disadvantages of close corporations

Advantages:

• CC is legal entity with continuity of existence
• Members have limited liability protection
• Very few legal requirements like auditing or annual meetings
• Can be converted to private company with members becoming shareholders
• Owner interest doesn't need to be proportional to capital contribution

Disadvantages:

• CC taxed at same rate as companies (higher than personal income tax)
• CC has limited growth and expansion - cannot exceed ten members
• Difficult for members to leave as all must agree to disposal
• Disagreement between members can delay decisions
• Member can be held personally liable for CC losses if acting incompetently

How criteria contribute to close corporation success or failure

Criteria	Success Factors	Failure Factors
Taxation	• CC pays income tax on profit • Profit distributed to members who pay personal tax • Close corporations exempted from dividend tax	• CC pays tax at same rate as companies • Higher than partnership tax rate
Management	• Members combine skills and expertise • No hierarchical structure - all members equal in decisions	• Members must do all administration • Members can disagree and delay decisions
Capital	• One to ten members can contribute capital • More capital can be made available • Members responsible for careful spending and management	• Compared to company, capital limited to ten members • If member leaves, their capital must be paid out
Division of profits	• Profits divided between members according to membership percentage • Members work harder to earn more profit	• During difficult times, profit decreases and members may lose faith
Legislation	• No new CCs can be formed but existing can continue for ten years • Members may be liable for business debts in certain circumstances	• Accounting officer must be appointed which is expensive • Very little legal control over CC management

Private company

A private company is formed according to the Companies Act No. 71 of 2008. The key characteristic is that it has limited liability but cannot sell shares to the general public or list on the Johannesburg Securities Exchange (JSE).

Key characteristics of private companies

• Needs minimum of one shareholder with no limit on total number
• Requires one or more directors and one or more shareholders
• Must register with CIPC by preparing a Memorandum of Incorporation
• Company name ends with "(Pty) Ltd"
• Cannot sell shares to the public
• Raises capital by issuing shares to shareholders
• Investors contribute capital to earn dividends from shares
• Company has legal personality and unlimited continuity
• Companies Act states that auditing of financial statements is optional
• Profits shared as dividends proportional to shares held
• Separate legal entity with unlimited continuity

Advantages and disadvantages of private companies

Advantages:

• Company has own legal identity with shareholders having limited liability
• Potential for good long-term growth
• Companies pay tax at fixed rate
• Board of directors with expertise can be appointed
• Not required to file annual financial statements with commission
• Legal person that can sign contracts independently
• Continuity of existence even if shareholders change
• Can easily raise capital by issuing shares to members

Disadvantages:

• Lot of capital required to start company
• More shareholders means fewer dividends each
• Must adhere to government tax requirements
• Directors may not have personal interest in company success
• Annual financial statements must be reviewed by qualified person
• Difficult to establish due to many legal requirements
• Personal liability on directors who participate in reckless/fraudulent conduct
• Pays tax on profits and shareholders pay secondary tax on dividends (double taxation)
• Companies must prepare annual financial statements

How criteria contribute to private company success or failure

Criteria	Success Factors	Failure Factors
Taxation	• Company pays tax at fixed rate on profit • Can obtain tax rebates for CSI projects • Can obtain government tenders if tax compliant	• Subject to double taxation - company and shareholders pay tax • May discourage investors from buying shares
Management	• Managed by competent highly skilled director • Management can improve with director accountability • Shareholders vote for most capable directors	• Directors may lack direct interest in company • Director fees increase company expenses • Some shareholders may not exercise voting rights • Large management structures slow decision-making
Capital	• More capital raised by issuing shares to shareholders • Large amounts possible with no shareholder limit • Company can access long-term capital for growth • Even non-transferable shares can raise considerable capital	• Cannot grow very large since cannot invite public investment • Transfer restrictions may not attract strong investors • Large capital amounts cannot be obtained as contribution limited to private shareholders
Division of profits	• High profits and good returns indicate company success • Profits can be re-invested to expand operations • Shareholders receive profits according to number of shares	• Shareholders may sell shares when dividends are low • Dividends not always paid which may discourage investors
Legislation	• Formation procedures simplified by new Companies Act • Limited liability allows greater risk-taking for growth • Auditing of financial statements gives shareholder assurance • No limit on shareholder numbers • Personal liability of shareholders doesn't affect company assets	• Formation procedures time-consuming, complicated and expensive • High formation/establishment expenses require large start-up capital • Annual audit of financial statements costly • Non-compliance may result in licence withdrawal by CIPC

Personal liability company

A personal liability company is very similar to a private company, but the main difference is the liability of the directors. In personal liability companies, directors can be held personally responsible for company debts.

Key characteristics of personal liability companies

• Company name must end with "INC"
• Past and present directors may be held responsible for company debts with unlimited liability
• Memorandum of Incorporation should state it is a personal liability company
• Company must have at least one director on its board

How criteria contribute to personal liability company success or failure

Criteria	Success Factors	Failure Factors
Taxation	• PLCs only pay tax after business expenses deducted • Company pays tax at fixed rate (can be lower than partnerships) • Can obtain tax rebates for CSI projects • Can obtain government tenders if tax compliant • Promotes business image when companies comply with tax laws	• Subject to double taxation when shareholders pay secondary tax • Can harm financially struggling companies

Public company

A public company is designed for large-scale operations requiring substantial capital investments. Public companies can offer their shares to the general public and may list on the JSE to sell shares publicly.

Key characteristics of public companies

• Minimum of one person required to start, but requires three or more directors and shareholders
• Must register with CIPC by preparing Memorandum of Incorporation
• Company name ends with "Ltd"
• Has legal personality and unlimited continuity
• Can raise capital by issuing shares to public and borrowing through debentures
• Can issue prospectus to public to raise capital
• Shareholders have limited liability
• Personal liability on directors who participate in reckless/fraudulent conduct
• Has legal personality and unlimited continuity
• Required to hold Annual General Meeting (AGM)
• Auditing of financial statements compulsory with statements available to shareholders and public
• Profits shared as dividends proportional to type and number of shares

Advantages and disadvantages of public companies

Advantages:

• Business has own legal identity
• Easy to raise funds for growth through share sales
• Shareholder liability limited to amount invested
• Shareholders can appoint knowledgeable board of directors
• Companies may buy and sell shares freely
• Shareholders can sell/transfer shares freely
• Public has access to information which could motivate share purchases
• Additional shares can be raised by issuing more shares or debentures
• Strict regulatory requirements protect shareholders

Disadvantages:

• Companies must disclose all financial information to shareholders
• Audits compulsory with significant costs for financial audits
• Stocks must be traded publicly
• Full report must be submitted to major shareholders annually
• Difficult and expensive to establish due to many legal requirements
• More shareholders means fewer dividends per shareholder
• Shareholders may have little input into company affairs
• Due to legislation, decisions take longer with possible disagreements
• Financial affairs must be known publicly which could benefit competitors

How criteria contribute to public company success or failure

Criteria	Success Factors	Failure Factors
Taxation	• Company pays tax at fixed rate on profit • Can obtain tax rebates for CSI involvement • Can obtain government tenders if tax compliant	• Subject to double taxation if shareholders pay secondary tax • Can harm companies already struggling financially
Management	• Managed by board of competent highly skilled directors • Management improves since directors accountable to shareholders • Shareholders vote for directors at AGM • Directors bring creative ideas encouraging efficiency	• Directors may lack direct interest in company • Directors may not be motivated due to shareholder-decided remuneration • Large management structure results in slow decision-making • Director fees increase expenses and reduce profit • Management may face legal challenges if reports don't comply • Some shareholders may not exercise voting rights
Capital	• Can raise large amounts of capital through public share and debenture sales • Share capital clause in Memorandum allows more shares to be issued • Public company shares can be listed on JSE giving exposure to more investors	• Growth limited if sufficient capital cannot be raised • Large amounts of capital required to start • Raising extra capital may be difficult in unfavourable economic climate • Share prices change constantly and may lose value • Increased shares may lead to more dividends paid and less retained profits
Division of profits	• High profits and good returns indicate success • Profits can be re-invested to expand business operations • Shareholders receive profits according to type and number of shares	• Shareholders may sell shares when dividends are low • Dividends not always paid which may discourage new investors
Legislation	• Companies must comply with Companies Act No. 71 of 2008 • Company and shareholders are separate entities encouraging investment • Limited liability allows greater risk-taking for business growth • Auditing gives shareholders assurance of proper management and raises additional finance	• Formation procedures time-consuming, complicated and expensive • High formation expenses require large start-up capital • Annual audit of financial statements costly • Non-compliance may result in licence withdrawal by CIPC

State-owned company

A state-owned company has the government as its major shareholder and falls under the Department of Public Enterprise. These businesses operate commercially on behalf of the government, often providing essential services.

Key characteristics of state-owned companies

• Must have three or more directors and one or more shareholders
• Must register with CIPC by preparing Memorandum of Incorporation
• Owned by government and operated for profit
• Listed as public companies
• Name ends with "SOC"
• Support private businesses by providing infrastructure like communications and electricity

Advantages and disadvantages of state-owned companies

Advantages:

• Profits may finance other state departments
• Offers essential services that private sector might not provide
• Prices kept reasonable creating fair competition with private sector
• Eliminates wasteful duplication of services
• Planning can be coordinated through central control
• Generate income to finance social programmes
• Create jobs for all skill levels

Disadvantages:

• Often results in poor management as government not as efficient as private sector
• Often inefficiency due to large business size
• Often relies on government subsidies
• Lack of incentives for employees without productivity bonuses
• Government can lose money through business
• Lack of incentives for employees without profit sharing
• Losses must be met by taxpayers
• Shares not freely tradable making capital raising difficult
• Must follow strict regulations for operations to raise capital
• Financial statements must be audited (expensive)

Non-profit companies (NPCs)

Non-profit companies are entities established to help people, protect the environment, or lobby for good causes. They include religious organisations, charities, and cultural organisations with the primary objective of benefiting the public rather than making profit.

Key characteristics of non-profit companies

• Main aim is to provide service, not make profit
• Funded by donations and foreign funding
• Company name must end with "NPC"
• All profits must be used for primary objectives of the organisation
• Must prepare Memorandum of Incorporation to register
• Qualifying NPCs are granted tax-exempt status

Advantages and disadvantages of non-profit companies

Advantages:

• Profits used solely for primary objective of organisation
• Provide social services to various communities (e.g. Meals on Wheels)
• Contributions/donations to NPCs are tax deductible encouraging more donations
• Member liability is limited
• NPCs have continuity of existence
• Most income of non-profit company is free from income taxes
• If qualifying, NPCs can receive grants

Disadvantages:

• NPCs don't generate enough capital to cover expenses
• Need professional assistance to establish organisation
• Donations from public may not always be enough
• Not allowed to pay bonuses to members
• Assets not distributed to members when closing but given to similar companies
• Obtaining grants can be slow and tiring process
• Not easy to create NPC - takes time, effort and money

How criteria contribute to non-profit company success or failure

Criteria	Success Factors	Failure Factors
Taxation	• May qualify for tax exemption if meeting criteria • May receive tax benefits/rebates for community involvement	• Required to pay income tax if engaged in unrelated business activities • Must meet tax requirements to maintain exemption
Management	• NPCs well managed as require minimum three directors • More directors can bring additional skills and expertise • Legally prescribed management structure ensures good organisation	• Large management structures can complicate/delay decisions • Directors may mismanage funds without direct NPC interest • Directors liable for loss/damage sustained by company • Directors may lack skills to manage resources
Capital	• Unlimited founders may contribute more capital • More capital may be raised through donations or sponsorships • Donors in non-profit companies may receive tax rebates encouraging contributions	• Founders may contribute limited capital insufficient for establishment and operation • Company relies on donations as main capital source which may hamper operation • May struggle to raise enough capital if failing to convince donors
Division of profits	• Profits used to finance other company needs	• May discourage potential investors as this is non-profit company
Legislation	• Company and owners (shareholders) are separate entities encouraging investment • Financial statements audited resulting in effective resource use	• Formation procedures time-consuming, complicated and expensive

Co-operatives

A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social or cultural needs through a jointly-owned enterprise. They share resources, infrastructure and costs to achieve better outcomes.

Key characteristics of co-operatives

• Minimum of five members required to start
• Objective is to create mutual benefits for members
• Legal entity that can own land and open bank accounts
• Members own and run business together, sharing equally in profits
• Decisions taken democratically with each member having one vote
• Managed by minimum of three directors
• Must register with Registrar of Co-operative Societies
• Word "Co-operative Limited" must appear at end of name
• Managed by minimum of three directors
• Motivated by service rather than profit

Advantages and disadvantages of co-operatives

Advantages:

• Co-operative liable for own debts so members enjoy limited liability
• Managed democratically because each member has one vote
• Formation easier than companies
• If meeting certain requirements, can receive financial support from Department of Trade and Industry
• Co-operative can appoint its management
• Profits shared amongst members according to number of transactions

Disadvantages:

• Funds of co-operative are limited
• Financial statements must be audited
• Shares not freely transferable
• Decisions often difficult to reach and time-consuming
• Success depends on member support
• Not much incentive for members to invest in co-operatives
• Often lack experienced and skilled business leaders

How criteria contribute to co-operative success or failure

Criteria	Success Factors	Failure Factors
Taxation	• Dividends declared by company to co-operative exempted from dividend tax	• Co-operatives taxed at same rate as companies which may be high
Management	• Co-operatives can appoint management • Board of directors (minimum two) chosen by shareholders • All members have one vote each with decisions made democratically	• Decisions often difficult to reach • Not all directors capable of good management
Capital	• Raises capital by issuing shares to members • If meeting requirements, can receive financial support from Department of Trade and Industry	• Funds of co-operative are limited making growth difficult
Division of profits	• Each member has equal share in co-operative	• Co-operative motivated by service rather than profit, meaning less profit for members
Legislation	• Co-operatives must register with Registrar of Co-operative Societies • Formation easier than companies	• Process of formation is timeous and difficult