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Summary Varsity College BCOM Year 1 Business Management 1A LU 3
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BMNG – Business LU 3LU 3 – Establishing a Business
3.2 The legal form of ownership
3.2.1 Introduction To The Legal Form Of Ownership
An enterprise = an organisational structure through which business is conducted.
First issue of entrepreneur -> the selection of the type of business they would like to open.
Issues that should be considered when deciding the form of ownership of a business enterprise include:
the extent to which the entrepreneur wants to be liable to financial and legal risk
who will have a controlling interest in the business and
how the business will be financed.
3.2.2 Considerations when choosing a form of enterprise
Legal(Or Juristic) Personality - a legal or juristic person/ organisation exists independently of its members. It is
seen as its own entity, it has its own rights, assets and obligations.
- Exception of juristic personality rule – personal liability company
o directors and previous directors are liable for payment of all contractual debts incurred
during their terms of appointment as directors
- Sole proprietors and partnerships are not a juristic persons – both liable in their personal capacities
for the debts of a business
- Companies, close corporations and co-operative societies are juristic persons
- The trustee or beneficiary of a business trust is not liable for the payments of trust debts.
Continuity / Perpetual Existence - existence is not affected by changes in its membership. This provides the
business with
Limited liability - the members are not liable for the debts or obligations of the juristic person, they usually
stand to lose only the capital they have contributed to the entity.
- Limited liability means the protection afforded by the juristic person to its members or owners in the
event of it being sued.
- Trusts - only the assets in the trust estate according to the trust deed are used to settle trust debts.
Degree of control or management authority the entrepreneur will be able to exercise over the activities of the
business is another factor to consider:
- A sole proprietor - total management autonomy.
- Companies - division between ownership and control.
- Partnerships , co-operative societies and close corporations – between total management and no
management
- Trust - can be apportioned between the trustee, the establisher of the business trust and the trust
beneficiaries.
1
, BMNG – Business LU 3
Capital acquisition is also an important factor to think about when opening a business.
- A public company = raising of large capital.
- In partnerships, close corporations and co-operative societies, the capital is provided by a limited
number of persons and, therefore , their financial positions are important.
Taxation is also something to consider. The rates of tax will vary depending on the kind of taxpayer.
The process to transfer the business should also be considered.
- Shares in public companies are very easily transferable and are the most liquid form of
investment in a business.
- In private companies, close corporations, co-operative societies and partnerships, the transfer of
an interest is dependent on the approval of the remaining members or partners.
- Beneficiaries of a business trust may transfer their rights in accordance with the trust deed.
3.2.3 The sole proprietorship
= business that is owned and managed by one individual.
Inexpensive and very easy to set up.
Not a separate legal (juristic) person. It does not exist independently of the owner of the proprietor.
- no legal separation of the personal and business assets of the owner. Any profit of the business
belongs to the owner in his or her personal capacity.
The lifespan of the business is dependent on the life of the owner.
Owner is liable for all debts and risks.
The owner has direct control and authority over the activities of the business. The owner usually manages the
business and is free to make all decisions concerning of the running of the business.
The capital acquisition potential of the sole proprietorship depends on the owner’s financial strength and
credibility. The owner may already have sufficient assets or could reply on loans.
The income is taxable in the hands of the owner as an individual taxpayer.
The transfer of ownership = simple.
ADVANTAGES OF A SOLE PROPRIETORSHIP
- It is simple to create
- It is the least expensive way to start a business
- Owner has total decision making authority
- There are no special legal restrictions
- It is easy to discontinue
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