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Forms Of Ownership Gr 8 IEB
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In depth notes with different forms, why its important etc.
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FORMS OF OWNERSHIPThe way a business has been put together
There are certain factors/elements that will influence the decision on which form
of ownership to choose as discussed below.
Forms of ownership differ from one another according to how:
a) Capital is raised-
✓ own capital contributed by the owner
✓ borrowed capital –also known as foreign capital, usually obtained
from financial institutions (eg banks)
✓ The nature and size of the enterprise will be indicative of the
amount of initial capital required. Future capital requirements
and the need to expand must also be kept in mind.
✓ Initially, it is mainly the number of owners and their personal creditworthiness
that determine the procurement potential of the enterprise.
b) Continuity of existence
The ability of the business to continue/survive independent of the owners in its
present form of ownership (eg if business does not have continuity of existence,
the business will be terminated / closed if the owner dies or retires.
If business has continuity, the business will continue even if there is a change in
ownership.
c) Liability
The responsibility for the debt of the business .
• If owner has unlimited liability, he / she may lose her personal
belongings if the business cannot settle all debts
• If owner has limited liability, his/her personal belongings are
not at risk if there are insufficient assets in the business to cover
its debts.
• Limited liability means that the people who own, operate or manage
such a business entity are not liable for its debts. All assets, profits and
losses belong to the business. If there are not enough assets to pay
creditors, the business entity may become insolvent, which means it is
unable to pay its debts.
• The owners enjoy limited liability for the debts of the business and may lose
only what they have invested in, or put into, the business. Their personal
possessions cannot be claimed
, • to pay for the debts of the business. This concept is important as it
limits the risk, for the owners, of owning a business.
d) Legal Persona
The legal right of a person or business to enter into contracts, to own property and
to sue and be sued
If a business possesses legal persona, this means it operates as a separate legal entity
to the owners
Certain forms of enterprise have a legal personality, which is also referred to as being
incorporated. Accordingly, these enterprises can exist independently of their owners.
This then implies/ means that:
• under normal circumstances the owners are not, in their personal capacity,
responsible for the debts of the firm.
• in principle, the enterprise has an unlimited lifespan and is not dependent on the
life span of its owners
• ownership is transferable.
e) Tax Implications/considerations
✓ The formal businesses must pay tax. The progressive
tax system applies to individuals in South Africa- the
higher the income, the higher the tax percentage.
✓ Each form of ownership has its own unique tax
structures and this will be normally taken into
consideration when deciding on what form of
ownership will be most suitable.
✓ For example, for sole proprietorship and partnerships
the owner or partners pay tax in their personal capacity
while close corporations and companies pay tax at a
fixed rate determined by the minister of finance. http://www.northwestbuffalo.org/2018/01/17/free-tax-
prep-2/
(f) Establishment procedures and administrative requirements.
Certain forms of enterprise can be established only after lengthy and cumbersome
procedures while, for others, these have been streamlined to entail little effort and red
tape, This holds true for the legal and administrative requirements during the life of the
enterprise.
Formal businesses have to register. The Companies Act 71 of 2008 regulates all formal
business registrations.
Companies Act/law of 2008 encourages entrepreneurship by regulating the :
✓ Formation
✓ Conduct of affairs
✓ Liquidation (the process by which a company or part of it is brought to an end,
and the assets and property of the company are redistributed.
✓ Prohibits trading in a reckless, negligent and fraudulent manner.
✓ In order for anyone to register a company, first register as a customer with the
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