TOPIC 2: BASIC CHARACTERISTICS OF DIFFERENT TYPES OF BUSINESS
ORGANSIZATIONS
Introduction
- Overview of the types of business organizations:
o Sole proprietorships
o Closely held undertakings
o Widely held undertakings
o SOC’s
o Non-Profits
SOLE PROPRIETORSHIPS
- Nature:
o Natural person can conduct business for own account
o Business is merely conducted by the natural person
o Personal liability and no separation from personal estate
o Finance by self and creditors
o May have employees but cannot be conducted with others on the same level
§ This constrains the activities that can be performed
- Business name
o Business Names Act 27 of 1960 and now Consumer Protection Act 68 of 2008
(Sections 79-81)
o Section 79(1) contains the general prohibition on business names. Only the
following are allowed:
§ Full name in an identification document in the case of an individual;
OR
§ Name registered in terms of a public regulation, in the case of a
juristic person, OR
§ Business name registered in terms of section 80
o Section 79(2) states what information a sole proprietorship must provide
regarding its identity:
§ The name used under which business is conducted
§ The place of the business
§ The name of the person to whom the business name is registered
o Section 79(3) deals with what can be done if these provisions are not
followed:
§ Compliance notice can be issued, that is all.
§ No impact on contracts of illegal name used as long as there is still an
agreement
o Section 80-81 sets out how you can register a business name and the
requirements that will have to be met
- Claims brought by and against a sole proprietor
o Superior Court Rule 14 and Magistrate’s Court Rule 54(4): Permits the sole
proprietor to sue and be sued in the name under which he/she conducts
business.
, o This applies regardless of whether the requirements set out in the CPA have
been complied with or not.
- Tax of a sole proprietorship
o Tax will be levied together with the other income he/she receives
o Benefit: If there is a loss you can write it off against any profits you make in
the future and then you do not pay tax on those profits
CLOSELY HELD UNDERTAKINGS
- Meaning:
o Business organizations conducted by more than one person together
o Still a close group cooperating and working together closely
- List of closely held undertakings:
o Partnership
o Private company
o Personal liability company
o Closed Corporation
o Trust
1. Partnership
o What does a partnership mean?
§ Important to look at the context
• Firstly, partnerships are concluded by means of a contract so
sometimes when we talk about a partnership, we talk about
the contract
• Secondly, it can refer to the partnership estate
• Thirdly, it can refer to those who are involved in the business
(the partners)
o Definition
§ It is a legal relationship created by a contract between two or more
persons
o Basic requirements of a partnership contract [Loots v Nieuwenhuizen 1997 1
SA 362 (T)]
a) Each partner agrees to make a contribution
§ Must have economic value (Property, money or even skills)
§ Provide property or the right to use property (Free or reduced rent)
§ Undertaking to provide, even if it has not been made
b) Business (Anything which occupies the type of a person) must be carried
on in common (Common fund/partnership estate must be created for the
partnership) and for joint benefit of the partners
§ Societas leonine (Only share in the losses)
§ In a partnership you may not share only in losses (as with the societas
leonine), but you do not have to share in the profits equally. You may,
however, only share in profit and not in net losses. Lastly, the profit
being shared is only the net profit.
c) Agreement must be concluded to conduct a business for profit
§ Refers to any economic benefit. It does not have to be monetary to be
considered a profit.
, d) Intention to create a partnership
§ Even if all the other requirements are met, if the parties did not
intend to enter into a partnership, it would not be viewed as a
partnership.
e) Lawfulness
§ Partnership must be lawful, but this is not a requirement in the form
of an essentialia of the contract.
o Features of a partnership
§ Is there a limit on the number of partners?
• Section 30 of the old Companies Act = Limit of 20 partners
• No limits today
§ Lack of juristic personality
• Two approaches [DF Scott (EP) (Pty) Ltd v Golden Valley
Supermarket 2002 6 SA 297 (SCA)]
o Aggregate theory = Business organizations is not more
than the sum of its parts. Therefore, not a person.
o Entity theory = Business organization becomes a
separate legal entity.
• We adopted the aggregate approach from English law.
o Therefore, partnerships do not have juristic
personalities.
• Section 79(1)(a)(ii) of the Consumer Protection Act
o “Registered in terms of a public regulation, in the case
of a juristic person”
o CPA: Juristic person includes, inter alia, a partnership
but there is no statute that regulates partnerships
o Therefore, section 79(1)(b) will apply in regard to the
name of the partnership
• Exceptions where a partnership will be treated as an entity
o Insolvency Act 24 of 1936:
§ Section 2: Partnerships and individuals are
sequestrated (not liquidated) if they cannot pay
its debts.
§ Section 13: If the partnership is sequestrated,
all the partners are sequestrated at the same
time unless the partner gives security that
would be sufficient to cover the liabilities.
• What happens if a partner is a juristic
person because a juristic person cannot
be sequestrated, they have to be
liquidated.
• Commissioner, SARS v Hawker Air
Services (Pty) Ltd:
o Held that you could still
sequestrate a partnership, but
the juristic person partners will
, not be sequestrated or
liquidated.
o Only the partners that can be
sequestrated will be
sequestrated.
o Court held that although there
are problems with this, this is the
lesser of two evils.
§ Section 49: Estates of partners and the
partnership are separately dealt with and only if
there are surpluses in partner estates will they
be paid over to the partnership and vice versa.
NB: DIAGRAMS ON SLIDES
• Purpose of this rule: To keep estates
separate and to not necessarily benefit
one over the other
• Extension of the rule is that partners
also cannot claim from the partnership
and vice versa:
o What if there are two
partnerships?
§ Silbert & Co v Evans & Co
1912: When they are
conducted separately,
they will be treated as
separate entities and it
will be possible for the
partnerships to prove
claims against each other,
even though there might
be one overlapping
partner.
o Partnership 1 has two partners A
and B; partnership 2 has two
partners B and C
§ De Villiers J: Will not be
possible to prove claims
against one another
o Partnership 1 (minor
partnership) that has two
partners A and B; partnership 2
(major partnership) has three
partners A, B and C.
§ Minor partnership will
not be able to prove
claims against the major
partnership, but the
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