Topic 10 Forms of Ownership Flashcards

Question

The business is seen as a legal person and can enter into contracts in the name of the business.

Answer 1

Legal personality

Answer 2

The letters "CC"

Answer 3

The word Limited or the letters "LTD"

Answer 4

The letters (PTY)Ltd

Answer 5

No legal requirements to start- quick and low cost

Answer 6

The owner is the legal entity and has to enter into a contract in his/her own name. This means the owner carries all the risks

Answer 7

The business has no continuity or existence

Answer 8

unlimited liability

Answer 9

depends on the profit generated by the business. | Refer to the tax scales for this discussion. If profit is below R272 70

Answer 10

If the business does not require a large amount of capital and the owner is capable of raising all capital in his own capacity

Answer 11

**Define:** 📌 A partnership is an arrangement where 2 or more parties, known as business partners, agree to form a business for their mutual interest. **Characteristics** 🥸 There should be at least a minimum of two people in a partnership. 🥸 The partnership agreement becomes the basis of the association between the partners. 🥸 Partners combine capital and may also borrow capital from financial institutions. 🥸 They share the profit according to the partnership agreement. 🥸 Partners share responsibilities and they are all involved in making business decisions. 🥸 Every partner in the business has unlimited liability and are jointly and severally liable for the debts of the business. 🥸 There are no legal requirements regarding the name of the business. 🥸 Partners share profits made and they are therefore motivated to work harder. 🥸 The partnership has no legal personality and therefore has no continuity. 🥸 The partnership does not pay income tax, only the partners in their personal capacities. 🥸 Auditing of financial statements is optional. **Advantages** ✅ Each partner will bring their knowledge, skills, experience, and contacts to the business thus giving the business a better chance to succeed. ✅ All partners have a personal interest in the business. ✅ The workload and responsibility are shared between partners and each partner can focus on their strengths. ✅ Partners invest new capital into the business to finance expansion. ✅ Partners share responsibilities for decision-making and managing the business. ✅ Partnerships are not compelled by law to prepare audited financial statements. ✅ Partners are taxed in their capacities, which could lead to lower taxation – this will be dependent on the level of income of each individual. ✅ Partners share profits made and they are therefore motivated to work harder. **Disadvantages** ❌ Partners might still find it difficult to raise capital as not all partners contribute cash. ❌ Partners are jointly and severally liable for the actions of the other partners. ❌ The partnership has no independent legal existence distinct from the partners, it will be dissolved upon registration or death of one of the partners. ❌ Partners do not have a separate legal personality – the partners are personally liable for debts and losses incurred. ❌ Different personalities and options of partners can lead to conflict and disagreements. ❌ Each business partner is legally responsible for the joint liability of the partnership. ❌ A partnership has unlimited liability, which means that partners risk losing their personal possessions. ❌ Discussion between partners can slow down decision-making, and they may disagree on important business decisions. ❌ In a large partnership, the partners may struggle to agree on business issues. ❌ Partnership lacks continuity, if one of the partners dies/retires, the partnership needs to dissolve and a new agreement has to be drawn up.

Answer 12

**Define:** 📌 A private company is a company whose shares may **NOT** be offered to the public for sale. **Characteristics** 🥸 A private company can have an unlimited number of shareholders, however, a minimum of one director and one shareholder is required. 🥸 The liability of shareholders is limited to the number of shares held by them. 🥸 Raises capital by issuing shares privately to its shareholders. 🥸 The name of a private company must end with the words **‘(Proprietary) Limited’ or ‘(Pty) Ltd**’. 🥸 The company has a legal personality therefore it has unlimited continuity even in the case of death, insolvency, the bankruptcy of any of its shareholders. 🥸 A private company is not allowed to sell shares to the public. 🥸 Profits are shared in the form of dividends in proportion to the number of shares held. 🥸 It needs to be registered with the registrar of companies by drawing up a **Memorandum of Incorporation.** 🥸 The Companies Act (No. 71 of 2008) imposes personal liability on directors who are knowingly part of the carrying on of the business recklessly or fraudulently. 🥸 A private company must prepare annual financial statements. 🥸 Annual financial statements need not be either audited or independently reviewed. **Advantages** ✅ A company can continue to trade even if one shareholder dies/resigns. ✅ It is managed at least by one competent highly skilled director. ✅ Shareholders must agree to the sale of transfer of shares. ✅ Shareholder’s liability is restricted to the number of shares they own. ✅ Information in a private company is only available to shareholders. ✅ Not required to file annual financial statements with the commission. ✅ Shareholders can appoint the most capable directors to manage their company. ✅ The company has its own legal identity and shareholders have no direct legal implications/limited liability. ✅ A large amount of capital can be raised since there is no limit on the number of shareholders. ✅ It is possible to sell a private company as it is a legal entity in its own right. ✅ The management of the company can improve since directors are appointed by shareholders. ✅ The company can access long-term capital and therefore has good long-term growth opportunities. ✅ The company is a separate legal person so it may purchase assets in its name. **Disadvantages** ❌ Private companies are subject to many legal requirements and regulations which can be onerous. ❌ Decision-making takes time because of the large number of people in management. ❌ The private company cannot be listed on the stock exchange, therefore, it cannot sell shares to the public. ❌ Directors may sometimes act in their own interest, not in the company’s best interest. ❌ Annual financial statements must be reviewed by a qualified person, which is an extra expense to the company. ❌ Difficult and expensive to establish as the company is subjected to many legal requirements. ❌ The Private company pays tax on the profits of the business and on declared dividends and are therefore subject to double taxation. ❌ Directors may sometimes be held liable for debts if it can be proven that they committed fraud. ❌ Some shareholders may not exercise their voting rights resulting in choosing the wrong person as a director.

Answer 13

**Define:** 📌 A personal liability company is mainly used by associations such as lawyers and accountants. **Characteristics of a personal liability company** 🥸 The name of the personal liability company ends with INC. 🥸 required to have a minimum of one director on the board of directors. 🥸 The Memorandum of Incorporation can be altered to require more than one director on the board. 🥸 Directors have unlimited liability and they are jointly liable for the debts of the business even if they are no longer active in the business. 🥸 The Memorandum of Incorporation should state that it is a personal liability company. **NOTE: The advantages **of a personal liability company are the same as those for a private company. **The disadvantages** of a personal liability company are also the same as those for a private company, except that the directors of the personal liability company have unlimited liability.

Answer 14

**Define:** 📌 The public company is a company that is registered to offer shares and stock to the general public. **Characteristics of a personal liability company** 🥸 A minimum of one person is required to start a public company. 🥸 The company name ends with the letters Ltd. 🥸 Shareholders have limited liability and are not personally liable for the debts of the business. 🥸 Individuals can own shares in this company and these shares are freely transferable. 🥸 A prospectus is issued to the public to invite the public to invest in the company to raise capital. 🥸 A public company has a separate legal personality and therefore has unlimited continuity. 🥸 A public company has a separate legal personality. 🥸 Requires three or more directors and three or more shareholders. 🥸 Profits are shared in the form of dividends in proportion to the shares held. 🥸 A public company is required to hold an AGM where shareholders vote to elect a new board of directors. 🥸 Must register with the Registrar of Companies by drawing up a Memorandum of Incorporation. 🥸 Raises capital by issuing shares to the public and borrowing capital by issuing debentures. 🥸 Auditing of financial statements is compulsory and audited statements are made available to shareholders and the public. **Advantages** ✅ Public companies enjoy the ability to raise funds through the sale of the company’s stock to the public. ✅ The business has its own legal identity and can own assets/property. ✅ Managed by at least three competent, highly skilled directors. ✅ Directors bring creative ideas which encourage innovation/high productivity. ✅ Shareholders can sell/transfer their shares freely. ✅ The ability to raise large amounts of capital in public exchanges enables the company to carry out capital-intensive activities. ✅ Strict regulatory requirements protect shareholders. ✅ Easy to raise funds for growth through the sale of shares. ✅ Additional shares can be raised by issuing more shares or debentures. ✅ No limitation on the number of shareholders, so growth/expansion is not limited. ✅ Shareholders have limited liability for the debt of the company and may lose only the amount invested in the business. ✅ The management of the company can improve since directors are accountable to shareholders. ✅ The public has access to information and this could motivate them to buy shares from a company. **Disadvantages** ❌ Public companies are vulnerable to increased scrutiny from the government and the public. ❌ Difficult and expensive to establish as the company is subjected to many legal requirements. ❌ They must prepare their financial reports in accordance with the Generally ❌ Directors may not be motivated to work very hard because shareholders decide on the directors’ remuneration. ❌ Directors may not have a direct interest in the company, which slows down the growth and profi t. ❌ Increased director’s fees, will increase expenses which will reduce net profi t. ❌ Some shareholders may not exercise their voting rights resulting in choosing the wrong person as a director. ❌ A full fi nancial report must be submitted to the major shareholders each year. ❌ A large management structure can result in longer timeframes for decision-making. ❌ Auditing of fi nancial statements are compulsory.

Answer 15

Generally Accepted Accounting Principles

Answer 16

**Defining a state-owned company (SOC)** In a state-owned company, the government is a major shareholder, and it falls under the Department of Public Enterprise. These companies perform specific functions and operate in accordance with a particular Act. They take on the role of commercial enterprise on behalf of the government. *Examples of state-owned companies in South Africa include Armscor, Alexkor, SAA, Eskom, Transnet.* **Characteristics of an SOC** 🥸 The state-owned company is financed by the government. 🥸 The name ends with the letters SOC. 🥸 The SOC is listed as a public company. 🥸 These enterprises are managed by the government not by individuals. 🥸 Requires three or more directors and one or more shareholders. 🥸 SOCs are registered with the Registrar of Companies by drawing up a Memorandum of Incorporation. 🥸 The Act imposes personal liability on directors who knowingly participate in reckless or fraudulent business. 🥸 The state-owned company must have its financial statements audited. 🥸 A state-owned company is compelled to hold an AGM. 🥸 A state-owned company has a separate legal personality and its shareholders have limited liability. **Advantages of an SOC** ✅ SOCs help eliminate economic exploitation and oppression. ✅ They offer essential services which may not be offered by the private sector. ✅ Shareholders have limited liability. ✅ Profits may be used to finance other state departments. ✅ Wasteful duplication of services is eliminated. ✅ Jobs are created for all skill levels. ✅ Generates income to finance social programmes. ✅ Prices are kept reasonable to make services affordable to more citizens. ✅ Provides healthy competition to private sector companies because of government contributions. ✅ Most of SOCs run on sound business lines as they have their surpluses to run their projects. ✅ An SOC company has a separate legal personality. **Disadvantages of an SOC** ❌ SOCs usually suffer from inefficiencies in management. ❌ Management of SOCs does not implement new ideas and innovations. ❌ Losses must be covered by the taxpayers. ❌ Government can lose money if the business fails. ❌ Shares are not freely tradable making it difficult to raise capital. ❌ A lack of incentive for employees to perform if there is no share in the profit. ❌ Often rely on government subsidies, which may not cover all the company’s expenses. ❌ SOCs must follow strict regulations for operations to raise capital. ❌ The management of the SOCs must attend an AGM. ❌ An SOC is compelled to have its financial statements audited.

Answer 17

**Defining a non-profi t company (NPC)** A non-profi t company is a legal entity organised and operated for a collective, public or social benefit. They include churches, charity organisations, and cultural organisations. The primary objective of an NPC is to benefi t the public, not to make a profit **Characteristics of NPCs** 🥸 The main aim is to provide a service and not to make a profit. 🥸 They are funded by donations and foreign funding. 🥸 The name of the company must end in NPC. 🥸 All profi ts must be used for the primary objective of the NPC. 🥸 It must prepare a Memorandum of Incorporation. 🥸 Qualifying NPCs are granted tax-exempt status. 🥸 The board of an NPC must comprise of at least three directors (three or more directors). 🥸 NPCs do not have share capital and cannot distribute shares or pay a dividend to their members. **Advantages of an NPC** ✅ Profits are used solely for the primary objective of the organisation. ✅ The company does not pay tax, so all earnings can be cycled back into the organisation to improve it. ✅ Donations made by donors are tax-deductible, therefore it motivates people to donate to the organisation. ✅ Employees of non-profi ts are not personally liable for the debts of the non-profit./The liability of the members is limited. ✅ An NPCs existence can last long after the founders leave the business. ✅ Can receive grants/aid from the government. ✅ A surplus of income is retained to further the goals of the business. ✅ Must prepare the fi nancial statements at the end of the year and is not compelled to audit the fi nancial statements. ✅ NPCs are not compelled to hold an AGM. **Disadvantages of an NPC** ❌ Need professional assistance to set up this organisation. ❌ Does not generate enough capital to cover their expenses. ❌ Donations may not always be enough to finance the company’s expenses. ❌ Assets are not distributed to the members upon closing down. ❌ Creating an NPC takes time/effort/money. ❌ Obtaining grants can be a slow and tiring process. ❌ Incorporators cannot take along the assets accumulated by the NPC if they decide to leave. ❌ They are not allowed to pay bonuses to members. ❌ They are compelled to prepare annual financial statements.

Answer 18

A co-operative society is a voluntary association that is established with the aim of service to its members. It is a form of business whereby people with similar interests link for promotion of common goals.

Topic 10 Forms of Ownership Flashcards

(52 cards)