In South African law there are 5 types of business organisations/ structures
Types of business structures include:
Sole trader/proprietorship
Partnership
Company
Close corporation
Business trust
Factors that must be considered when choosing a type of business structure include:
Who bears the risk?
How is capital raised?
What is the management structure?
Who exercises control?
Will there be perpetual succession?
Is there space for growth and expansion?
Taxation liability
Legal and administrative formalities and costs
THE SOLE TRADER/ PROPRIETERSHIP
Are the single legal owners of their business
They exercise complete control
They provide their own capital and bear all the legal responsibility for their business
They share profits alone and are liable for all losses alone
Are personally liable for debts incurred by the business
Due to there being no limited liability for sole traders, there is no difference drawn between
their personal asset and their business assets, therefore personal assets can be used to pay
off business debts
Depending on the type of business conducted, no registration may be required
DISADVANTAGES: - Personal liability for debts of the business
- Limited expansion of growth due to limited capital
, - Lack of legal continuity
- Increased tax liability
Financial statements are not audited
THE PARTNERSHIP
An association formed with the intention to make a profit
A partnership is a business structure aimed at making and sharing profits
Cannot be formed with the objective of being a charity/ non- profit
Partnership is formed through a partnership agreement which may be in writing, orally
discussed or tacitly implied through conduct
Consists of a minimum of two partners and a maximum of twenty partners
All partners must participate in the management of the business and each get a share of the
net profit of the business
Partners are jointly owners of the assets of the partnership
Immoveable property must be registered in the names of the partners
Partnership liabilities are liabilities of the individual partners
Partners are thus jointly, severally and ultimately liable for all debts and
liabilities of the partnership
Partners share net profits according to proportions agreed upon in the partnership
agreement, be it equally or based on contribution
If no proportion agreement, profits are shared according to the value of
each partners contribution
If this is not possible due to one partner having contributed skill or labour,
then profits are shared equally
DISADVANTAGES: - Does not have perpetual succession
- Automatic dissolution of the partnership occurs when one partner
decides to exit partnership, death, insolvency or retirement and
results in the need for creating a new partnership
- Legal continuity is disrupted by the entry or exit of any partner
- Partnerships not subject to income tax
Financial statements not audited
,THE COMPANY
Is a structure that is endorsed by law with the capacity to acquire legal rights and be subject
to legal duties
PUBLIC COMPANY: formed to raise large sums of money from the public in return for shares
issued to them that are transferable
PRIVATE COMPANY: formed where shareholders contribute their own funds to the capital of
the company in return for shares that are not transferrable
Has a separate legal personality from the members who compose it
The company is the legal owner of itself, property and assets bought in its name and not the
shareholders or members as it is a separate legal person
CASE: Dadoo Ltd v Krugersdorp Municipality Council
Court found that even if there is a one-man company, all property and assets would
belong to the company and not to the one-man.
All property bought for the company is registered in the company’s name and all profits
belong to the company
Debts and liabilities also belong to the company and not to separate share holders
A company can sue and be sued in its own name
ADVANTAGES: -Has limited liability, therefore creditors can claim debts from the company
only
-Have perpetual succession= enables shareholders to sell their shares
without affecting legal existence of company
-Have legal continuity= can exist even if members or shareholders change
-Growth and expansion viable
-Formation of a public company requires just one shareholder
-Can be formed with the objective of being a non-profit
DISADVANTAGES: -Compliance with legal formalities for the registration of a company
-Company must be registered with the Companies and Intellectual
---Property Commission
, -Formation of company requires a constitution aka a Memorandum
of Incorporation
-Company is subject to regulation throughout its existence
-Annual financial statements are audited
THE CLOSED CORPORATION
Introduced by the Closed Corporations Act 69 of 1984
Purpose was to make it easier for sole proprietors and small partnerships to obtain benefits
such as a separate legal personality, limited liability and perpetual succession by becoming a
closed corporation
Closed corporations are flexible, small, easy, simple and less expensive
There are no shares or board members
Designed mainly for the small and unsophisticated businesses
All members of closed corporations are entitled to be management of said closed
corporation
Membership of a closed corporation is limited to 10 members
Closed corporations must also register with the companies’ commission and have a
constitution
As per the Act, from 1 May 2011, no new closed corporations may be formed, no companies
can convert to a closed corporation, but closed corporations can convert into a company.
DIFFERENCES BETWEEN A CLOSED CORPORATION AND A PRIVATE COMPANY
CLOSED CORPORATION PRIVATE COMPANY
Has members only Has a board of directors
Has no shares There are shares limited to shareholders only
Members limited to 10 persons No limit to number of members
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