BUSINESS STUDIES

GRADE 11
TERM ONE
CHAPTER FIVE

BENEFITS OF THE COMPANY OVER OTHER FORMS OF

OWNERSHIP

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 TABLE OF CONTENTS
TOPICS PAGES
Exam guidelines for forms of ownership 3
Terms and definitions 4
Characteristics, advantages & disadvantages of a sole 5 -6
trader
Characteristics, advantages & disadvantages of a 6-7
partnership
Characteristics, advantages & disadvantages of Close 7
Cooperation
Characteristics, advantages & disadvantages of a 7-8
private company
Characteristics, advantages & disadvantages of a 8-9
Personal Liability Company
Characteristics, advantages & disadvantages of public 9-10
company
Characteristics, advantages & disadvantages of a state 10-11
owned company
Difference between the private and public company 12
Difference between the private and a Personal Liability 12
Company
Characteristics, advantages & disadvantages of 12
cooperatives
Benefits of establishing a company over other forms of 13-14
ownership
Challenges of establishing a company over other forms 14-15
of ownership
Procedure for the formation of companies 15
Legal requirements of the name of the company 15
Memorandum of incorporation/MOI 15
Notice of Incorporation 15
Prospectus 15-16
This chapter consists of 16 Pages

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CONTENT DETAILS FOR TEACHING, LEARNING AND ASSESSMENT
PURPOSES

BENFITS OF A COMPANY OVER OTHER FORMS OF OWNERSHIP

Learners must be able to:

 Discuss/Explain/Describe the characteristics, advantages and disadvantages of the
forms of ownership. (Recap)
 Distinguish/Differentiate/Tabulate the differences between forms of ownership.
 Discuss/Explain the benefits of establishing a company versus other forms of ownership
e.g.:
o Legal status and liability.
o Profit sharing
o Ownership and management
o Capital and cash flow
o Life span and continuity
o Taxation
 Discuss/Explain the challenges of establishing a company versus other forms according
to the above mentioned benefits.
 Explain/Describe/Discuss the procedure for the formation of companies.
 Discuss/Explain the legal requirements of the name of the company, e.g.:
o A company is not allowed to use a misleading name,
o A name reservation is valid for six months, etc.
 Define the following concepts:
o Memorandum of incorporation
o Notice of incorporation
o Prospectus, i.e. initial & secondary offer
 Outline the aspects that must be included in the prospectus.

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TERMS AND DEFINITIONS
TERM DEFINITION
Form of ownership The legal position of the business and the way it is owned.
Continuity Continue to exist even if a change of ownership takes place, e.g. a
member or shareholder dies or retires.
Securities Shares and bonds issued by a company.
Limited liability Loses are limited to the amount that the owner invested in the business.
Unlimited liability The owner’s personal assets may be seized to pay for the debts of the
business.
Memorandum of The document that sets out the rights, responsibilities and duties of
Incorporation (MOI) shareholders and directors.(serves as a constitution of a company).
Sole Trader /Sole A business is owned and controlled by one person who takes all the decisions,
proprietor responsibility and profits from the business they run.
Partnership An agreement between two or more parties that have agreed to finance and
work together in the pursuit of common business goals.
Co-operative society Autonomous association of persons united voluntarily to meet their common
economic/ social needs/aspirations through a jointly owned and democratically
controlled enterprise.
Company A company is a legal person who has capacity and powers to act on its own.

Public company A public company is a voluntary association of ONE or more persons,

governed by the company Act 71 of 2008, incorporated in terms of the
Memorandum of Incorporation.
Private company A private company is a voluntary association of 1 or more persons.

Personal liability A personal liability company is a voluntary association of 1 or more person.

company
State-Owned A state-owned company (SOC) is a legal entity that is created by the
company government in order to participate in commercial activities on its behalf.
Partnership Article A document that contains exhaustive provisions with regards to the
matters concerning the business and the partners.
Prospectus Prospectus is a document inviting the public to buy securities/shares.
Annual General A meeting held once a year where the shareholders receive a report
Meeting (AGM) stating how well the company has done.
Directors People elected to the board of a company by the shareholders to
represent the shareholders’ interests.

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1 CHARACTERISTICS, ADVANTAGES AND DISADVANTAGES OF THE
FORMS OF OWNERSHIP. (RECAP)

1. SOLE TRADE /SOLE PROPRIETOR

Definition
A sole trader is a business that is owned and managed by one person.

Characteristics of a sole trader

 One person can form a sole trader and is easy to start.
 It is inexpensive to start and the owner does not have to pay tax.
 There are no legal and administrative formalities in the formation of a sole trader.
 The profit of the business is belongs to the owner as there is no distinction between
the owner and the business.
 A sole proprietor is not a legal entity and agreements are entered into by the owner in
his\her personal capacity.
 Business has unlimited liability and the private possessions of the owner can be used
to pay the debts of the business

2 Advantages and disadvantages of a sole trader

ADVANTAGES DISADVANTAGES
-Owner makes all decisions. -Unlimited liability which means the owner is
responsible for all debts incurred by the business
-Requires little capital to start. -Cash flow is often a problem.
-All profits belong to the owner -Growth of business can be restricted due to lack
of capital.
-Simple management structure. -Not a legal entity and no continuity
-Can easily adapt to the needs of the -Difficult to attract highly skilled and
client/customer. knowledgeable employees.
-No legal process and requirements. -The owner is responsible for providing all the
capital needed.
-The assets of the business belong to -If the owner does not have enough
the owner. knowledge/experience the business may fail.
-There is personal encouragement and
personal contact between the owner
and customers.

2 PARTNERSHIP

2.1 Definition
 A partnership has two or more partners who own the business.
 These owners share the responsibility of the business and they share the financial and
management decision of the business.

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 2.2 Characteristics of a partnership
 An agreement between two or more people who combine labour, capital and
resources towards a common goal.
 Partners combine capital and may also borrow capital from financial institutions.
 No legal requirements regarding the name of the business.
 Partners have unlimited liability and are jointly and severally liable for the debts of the
business.
 Profit is shared according to the partnership agreement.
 Partnership does not pay tax partners pay personal income tax.
 Auditing of financial statements is optional.
 Partners share responsibilities and they are all involved in decision making.
 No legal formalities to start, only a written partnership agreement is required.
 The partnership does not pay income tax, only the partners in their personal
capacities.
 Diversity, specialisation and different skills of the partners can be used.
 Partnership has no legal personality and therefore has no continuity.
 Partners share responsibilities and they are all involved in decision making.

2.3 Advantages and disadvantages of partnership

ADVANTAGES DISADVANTAGES
-The partners able to put their knowledge and skills -A partnership has unlimited liability so all the
together to collectively make the best decisions. partners are liable for the debts if the
business becomes insolvent.
-The workload and responsibility is shared between -Each business partner is legally responsible
partners. for the joint liability of the partnership.
-Partners are able to share resources. -Different personalities and options of
partners can lead to conflict it disagreements.
-Partners are only required to pay tax in their -Partners might not all contribute equally.
personal and individual capacity.
-The partners have a personal interest in the -Loss in profits and stability of the business
business. can occur if a partner resigns/ dies/loses
interest in the business or is declared
bankrupt.
-Can bring in extra partners at any time. -There can be lack of capital and cash flow.
-Attract prospective employees with the option or
incentives of becoming a partner.
-Partnerships are relatively easy to establish.
-Partners contribute new skills and ideas into a
business
-Partners share responsibilities for decision making
and managing the business
-Partners share any profits and are therefore
motivated to work hard.
-Raising additional capital to finance further business
expansion is easy as there is no limit on the number
of partners.
-Partners are taxed in their own capacities, which
could lead to lower taxation.

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3 CLOSE CORPORATION

3.1 Characteristics of a Close Corporation

 Can have a minimum of one and maximum of ten members who share a common
goal.
 The word ‘close’ means that all members are involve and participate in its
management.
 Each member makes a contribution of some/assets/services towards the corporation.
 The name must ends with the suffix CC.
 Members have unlimited liability except where the CC has had more ten members for
six months or longer.
 A CC has its own legal personality and therefore has unlimited continuity.
 Auditing of books is optional as members only need an accounting officer to check
financial records.
 Transfer of a member’s interest must be approved by all other members.
 Profits are shared in proportion to the member’s interest in the CC.
3.2 Advantages and disadvantages of a Close Cooperation
ADVANTAGES DISADVANTAGES
-There are few legal requirements e.g. -Limited growth and expansion since a CC
auditing of financial statements/regular cannot have more than ten members.
annual general meetings.
-A CC is a legal entity and has continuity of -A member of a CC can be held personally
existence. liable for the losses of CC if the member acts
is incompetent.
-Can be converted to a private company -Audited financial statements may be required
and members may become shareholders. when applying for a loan.
-Members have limited liability -A CC is taxed as if it were a company, which
may be higher than personal tax rates.
-Owners’ interest in the CC does not need -Difficult for members to leave the CC as all
to be in proportion to their capital members must agree to dispose of a
contribution. member’s interest.
-CC may be exempted by CIPC from -A CC is taxed on its income and Standard
auditing its financial statements. Tax of Company (STC) based on member’s
dividends/ Double taxation.

4 Private Company
4.1 Definition
It can be a small or large company and has one or more directors.

4.2 Characteristics of a private company

 Requires one or more directors and one or more shareholders.
 It needs a minimum of one shareholder and there is no limit on the number of
shareholders that a private company may have.

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  Register with the registrar of companies by drawing up Memorandum of Incorporation.
 The company name ends with letters (PTY) Ltd.
 A private company is not allowed to sell shares to the public.
 Investors put capital in to earn profit from shares.
 The company has a legal personality as well as unlimited continuity.
 The auditing of financial statements is optional.
 Profits are shared in the form of dividends in proportion to the share held.
 Shareholders have a limited liability and will not lose their initial capital invested if the
business goes bankrupt.
 Shareholders have limited liability and a separate legal entity.
 Raises capital by issuing shares to its shareholders.
 Profits are shared in the form of dividends in proportion to the number of shares held.

4.3 Advantages and disadvantages of a private company

ADVANTAGES DISADVANTAGES
More opportunities to pay less taxation -Requires a lot of capital
-Good long-term growth opportunities -The more shareholders, the less profits
-Own legal identity and shareholders -More taxation requirements
have no direct legal implications/
limited liability.
-Board of directors with expertise -Directors do not have a personal interest
/experience can be appointed to take
decisions
-Not required to file annual financial -Annual financial statements must be reviewed by
statements with the commission. a qualified person, which is an extra expense to
the company.
-It is a legal person and can sign Difficult and expensive to establish as the
contracts in its own name. company is subjected to many legal requirements
-The new Act forces personal liability -Pays tax on the profits of the business and on
on directors who knowingly participated declared dividends/Subject to double taxation.
in carrying out business in a
reckless/fraudulent manner.
-Financial statements are private and -Must prepare annual financial statements.
not available to the general public.
-A company has continuity of existence -
-It is possible to sell a private company
as it is a legal entity in its own right.
-It can easy raise capital by issuing
shares to its members.

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5 PERSONAL LIABILITY COMPANY
5.1 Definition
 Very similar to a private company, the difference is that the directors of a Personal
Liability company are jointly and severally liable for all the debts and liabilities of the
company. This means that the directors have unlimited liability.
 The name of the personal liability company ends in INC and the name of the private
company ends in (PTY) Ltd.

5.2 Characteristics of a personal liability company

 The company name must end with letters INC
 Directors have unlimited liability and they are jointly liable for the debts of the business
even if they are long out of office.
 The memorandum of Incorporation should state that it is a personal liability company.
 They must at least have one director on their board of directors.
NOTE: Other characteristics of a personal liability company are the same as
the private company except the above mentioned two characteristics.

5.3 Advantages and/or disadvantages

NOTE: The advantages of a personal liability company are the same as the private
company.
The disadvantages are also the same as the private company except the
directors of the personal liability company have unlimited liability

6 PUBLIC COMPANY
6.1 Definition
 A public company is a company that is registered to offer its stock and shares to the
general public. This is mostly done through the Johannesburg Securities/Stock Exchange
(JSE).
 The public company is designed for a large –scale operation that require large capital
investments.

6.2 Characteristics of a public company

 A minimum of one person is required to start a public company.
 Requires three or more directors and three or more shareholders.
 Register with the Registrar of Companies by drawing up Memorandum of Incorporation.
 The company name ends with letters Ltd.
 Has legal personality and therefore has unlimited continuity
 Raises capital by issuing shares to the public and borrowing capital by issuing a
debenture.
 A prospectus is issued to the public to raise capital.
 Shareholders have a limited liability
 The new Act forces personal liability on directors who knowingly participated in carrying
out business in a reckless/fraudulent manner.
 The company has a legal personality as well as unlimited continuity.

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 A public company is required to hold an AGM (Annual General Meeting).
 Auditing of financial statements us compulsory and audited statements are available to
shareholders and the public.
 Profits are shared in the form of dividends in proportion to the share held.

6.3 Advantages and/or disadvantages

ADVANTAGES DISADVANTAGES
-The business has its own legal identity -Must disclose all financial information
-Easy to raise funds for growth through -Large amount of funds are spent on financial
the sale of shares. audits.
-Shareholder is only liable for the -Stocks have to be traded publicly.
amount which is invested/Shareholders
have limited liability.
-Can appoint a knowledgeable board of -A full report must be submitted to the major
directors. shareholders each year.
-Buy and sell shares freely. -Difficult and expensive to establish as the
company is subjected to many legal requirements
-Shareholders can sell/transfer their -The more shareholders, the less profit.
shares freely.
-The public has access to the -Shareholders may be allowed little or no input into
information and this could motivate the affairs of the company.
them to buy shares from a company.
-Additional shares can be raised by -Due to legislation, decisions take longer and there
issuing more shares or debentures may be disagreements.
-Strict regulatory requirements protect -Financial affairs must be known to publicly, this
shareholders. information could be used to competitors’
advantage.

7 State owned company

7.1 Definition
 A state owned company has the government as its major shareholder and falls under the
department of Public Enterprise.
 These businesses take on the role of commercial enterprise on behalf of the government.

7.2 Characteristics of a State Owned Company

 Requires three or more directors and one or more shareholders.
 Register with the Registrar of Companies by drawing up Memorandum of Incorporation.
 It is owned by the government and operated for profit.
 SOC is listed as a public company.
 The name ends with letters SOC.
 State –owned companies support private businesses by providing infrastructure such as
communication service /Post office and supply of electricity/Eskom.

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7.3 Advantages and disadvantages
Advantages Disadvantages
-Profits may be used to finance other state -May result to poor management as
departments government is not always as efficient as
the private sector.
-Offer essential services which may not -Inefficiency due to the size of the business
be offered by the private sector
-Prices are kept reasonable/Create sound -Often rely on government subsidies
competition with the private sector to make
services affordable to more citizens.
-Wasteful duplication of services is -A lack of incentive for employees to
eliminated perform if there is no absence of other
motivator such as productivity bonuses.
-Planning can be coordinated through -Government can lose money through the
central control. business.
-Generates income to finance social -A lack of incentive for employees to
programmes. perform if there is no share in the profit.
-Jobs are created for all skills levels. -Losses must be met by the tax payer.
-Shares are not freely tradable making it
difficult to raise capital.
-SOC must follow strict regulations for
operations to raise capital.
-Financial statements must be audited

8 Differences between the private and public company

PRIVATE COMPANY PUBLIC COMPANY
- May no offer shares to the - Trades its shares publicly on the
general public. Johannesburg Securities Exchange.
- Shares are not freely transferable - Shares are freely transferable.

- Minimum of one director. - Minimum of three directors.

- Name must end with Proprietary - Name must end with Limited/Ltd.
Limited/(Pty) Ltd.
- Annual financial statements need - Annual financial statements need to be audited
not be audited and published. and published.
- Does not need to publish a - Have to register and publish a prospectus with
prospectus as it cannot trade its the Companies and Intellectual Property
shares publicly. Commission/CIPC.
- The company is not required to - Must raise a minimum subscription prior to
raise the minimum subscription/ commencement of the company.
issue minimum shares.

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 9 Differences between the private and a personal liability company
PRIVATE COMPANY STATE OWNED COMPANY
The name ends with (PTY) Ltd The name ends with INC
The directors are not personally liable The directors are personally liable for the
for the debts of the business. debts of the business.

10 Cooperatives
10.1 Definition
 A cooperative is a traditional way of a group of interested parties getting together and
sharing resources/infrastructures and costs to achieve a better outcome.

10.2 Characteristics of cooperatives

 Minimum of five members is required to start a cooperative.
 Register with the Registrar of Companies
 Legal entity and can own land and open bank accounts.
 Members own and run the business together and share equally in its profits.
 Decisions are taken democratically
 They are motivated by service rather than profit
 Must register with the Registrar of Cooperatives Societies
 The word ‘Cooperative Limited’ must appear at the end of its name.
 They are managed by a minimum of three directors.
 The objective of a co-operative is to create mutual benefit for the members.

10.3 Advantages and/or disadvantages of cooperatives

ADVANTAGES DISADVANTAGES
-Access to resources and funding -Decisions are often difficult to reach and
time consuming.
-Decision making is by a group -Difficult to grow a co-operative.
-Each member has an equal share in the -Very few promotion positions for staff.
business.
-A co-operative can appoint its own -It can be difficult to get a loan because their
management. main objective is not always to make a profit.
-Members have limited liability -The success of cooperatives depends on
the support of the members.
-The decisions are democratic and fair -Shares are not freely transferable
-Members are motivated because they are -All members have one vote regardless of
working for themselves the number of shares held.
-Can gain extra capital by asking its
members to buy shares.
-Co-operatives have continuity of
existence
-Resources of many people are pooled
together to achieve common objectives
Profits are shared equally amongst
members.

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 11 Benefits of establishing a company versus other forms of ownership

11.1 Legal status and liability

 A company has its own legal status, trading name and owns its assets.
 Shareholders' private assets are protected as they have limited liability.
 The shareholders have no direct legal responsibility.
 Companies have their own names and these are protected.

11.2 Profit sharing

 Shareholders share in the profits of the company through dividends

11.2 Ownership and management

 Shareholders are able to buy and sell shares freely in a public company.
 The company is managed by qualified and competent board of directors
 A company is less likely to use consultants as it has a larger pool of skills and
expertise
 Directors are more likely to take risks and allow growth opportunities for the business.

11.3 Capital and cash flow

 A company may has more investor’s to fund the setting up of the business.
 Companies have a better cash flow than sole traders.
 A company is not limited to the individual contribution of the members’ capital.
 The long term growth opportunities for companies are really good as there are
always possibilities of getting in more investors.
 Directors do not have to take out personal loans to grow the business

11.4 Life span and continuity

 A company has continuity of existence.
 Company shares can be transferred/bought/sold.


11.5 Taxation
• Companies have tax benefits other enterprises do not have
 They may obtain tax rebates if they are involved is social responsibility projects.

12 Challenges of establishing a company versus other forms of ownership

 Directors may not have a personal interest in the business and this could prevent
the business from gaining maximum growth and profits.
 Directors who do not have a personal interest in the business may not attract investors.
 There may be conflict between the owners of the company and management in
control.
 The more shares there are the less profit per share.
 A company is required to submit a full report to all stakeholders each financial
year.
 The limited liability aspect of the company generates more paper work in the
registration process.
 The owners of the company have more liability.
 When directors change there could be a lack of continuity in management.

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 Companies have more taxation requirements and other taxes are high.
 They are required to disclose all financial information which could provide their
competitors with an unfair advantage.
 Politics can get in the way and managers are appointed for the wrong reasons.
 State owned companies often deliver non-profitable services that lead to
government losing money through the business.
 A company can stop existing if deregistered by the Registrar of Companies.
 A large amount of money of funds is spent on financial audits and accounting fees
due to government regulations.

13 Procedure for the formation of companies

 Determine the people establishing the company
 Reserve a company name with the Registrar of Companies
 Prepare a memorandum of incorporation
 File a notice of incorporation
 Obtain a unique registration number
 All companies must be registered with the Registrar of Companies.
 Open a bank account and register for taxation.
 Draw up a prospectus for potential investors.
14 Legal requirements of the name of the company
 The name of a company must be original and must not be misleading.
 A company's name must appear on all company documents, e.g. on letterheads.
 Reserving a name for a company is the first step to register a company ,
but it is not compulsory.
 Names can be reserved for a period of 6 months by the CIPC.
 The name must not be similar/same as any other company unless it is part of the group.
 The name must not imply/suggest/mislead a person to believe that the company is part
of another person/business/the state.
 The name must not be offensive/promote violence/hatred and cause any harm.
 The name must not be shortened and translated.
 The name of a company must indicate the type of company as follows: The name of a
company must end with.

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15 Memorandum of incorporation/MOI
15.1 Meaning of memorandum of incorporation/MOI
 MOI serves as the constitution of a company.
 Companies are governed according to the rules stated in the MOI.
 Each company must provide a copy of its MOI to the Companies and
Intellectual Property Commission (CIPC).
 MOI describes the relationship between the business and its stakeholders.
 MOI describes the rights, responsibilities and duties of the shareholders and directors.
 Provides details about incorporation, the number of directors and the
share capital.
 Includes information about a company's name/registration office and records.

15.2 Aspects that must be included in the memorandum of incorporation

 Incorporators
 Nature of the company
 Securities of the company
 Shareholders and meetings
 Directors and officers
 Name of the company
 Main objectives of the company
 Number of shares each incorporator will purchase
 Amount of share capital registered
 Rules and regulations of the company
 Name of the auditor

16 Notice of incorporation
 The notice must be lodged together with the Standard Form of Memorandum of
Incorporation and it contains the following information
o Type of company
o Financial year-end
o Numbers of directors
o Incorporation date
o Registered address
o Company name

17 Prospectus
17.1 Meaning of a prospectus
 A prospectus is a written invitation to the public to buy the securities offered by a
public company.
 It is a formal legal document giving details about investment offerings to the public.
 A prospectus can only be issued by a company and it must be within three months
after the date of its registration.
 It gives information about the business.

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17.2 Meaning of the Initial order offer/IPO
 This is when the company issues shares to the public for the first time.
 The company must produce a prospectus before undertaking the initial offering.
 Most companies undertake an IPO with the assistance of an investment banking firm
acting in the capacity of an underwriter.

17.3 Meaning of the secondary offering

 A secondary offering is an offering of securities by a shareholder of the company as
opposed to the company itself, which is a primary offering
 A secondary offering is the sale of new or closely held shares by a company that has
already made an initial public offering (IPO)

17.4 Aspects that must be included in the prospectus

 Company overview, including the vision, mission and goals of a business
 Product or service portfolio
 Market analysis and strategy
 Management team
 The risk and potential of the business
 Available financial and share information
 Company's assets and liabilities
 Financial position
 Profits and losses
 Cash flow
 Prospects for growth
 Pre-incorporation contracts that have been signed
 Date of registration of the prospectus
 The minimum subscription

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