CHAPTER 16/17 – COMBINED CHAPTERS
FORMS OF OWNERSHIP
MEANING OF LIMITED LIABILITY AND UNLIMITED LIABILITY
MEANING OF LIMITED LIABILITY
• This is when shareholders are only liable for the amount that they invested in the company
• Example: If the business is bankrupt, the personal possessions of shareholders cannot be used to pay for the
debt of the business
MEANING OF UNLIMITED LIABILITY
• This is when the owner(s) are personally responsible for all the debts of the business
• Example: If the business is declared bankrupt, the personal possessions of the sole trader and partners may
be sold to pay off the debts of the business
CHARACTERISTICS OF EACH FORM OF OWNERSHIP
1) SOLE TRADER/ PROPRIETOR
DEFINITION
• A sole trader is a business that is owned and managed by one person
• The business owner handles everything including the activities of the business, its processes, and decisions
• It is most suitable for service businesses such as a doctor, hairdresser, electrician etc
CHARACTERISTICS
- Owner can sell the business to anyone at any time
- There are no legal requirements regarding the name of the business
- It is easy to establish as there are no legal formalities in forming the business
- Sole traders are not compelled by law to audit financial statements
- A sole trader has limited company for expansion and lacks continuity of existence
- Personal interest in the management - limited company for expansion and lacks continuity of existence
- Unlimited liability - owner is personally liable for the debt
IMPACT OF A SOLE TRADER
ADVANTAGES
No legal process and requirements
Simple management structure
All profits belong to the owner
Requires little capital to start
The assets of the business belong to the owner personally
DISADVANTAGES
Not a legal entity and no continuity
It is not always possible to pay high salaries
Growth of business can be restricted due to lack of capital
If the owner does not have enough knowledge or experience the business may fail
Difficult to attract highly skilled and knowledgeable employees
, CRITERIA THAT CONTRIBUTE TO THE SUCCESS AND/OR FAILURE OF A SOLE TRADER
FACTOR SUCCESS FAILURE
CAPACITY - Easy to control since it is a small business - Difficult to continue and grow long term
- Difficult to get good, well-trained staff
as they are expensive
- Owner has to manage and carry out all
business functions
MANAGEMENT - One owner so there are no disagreements - Owner has to do all the administration,
- Can make quick decisions without having to management, and decision-making in
consult others the business
- Owners has to rely on own decisions
and could make incorrect ones
TAXATION - Owner only taxed on profits in personal - If profits get too big may end up paying
capacity high tax in personal capacity
- Depending on how much income the owner - Failure by the owner to comply with
earns, his/her tax rate may be lower than personal income tax regulations could
the company tax rate lead to substantial financial penalties
- If the owner earns below a certain imposed by SARS
threshold amount per year, no income tax is
payable, and the business’s profits are thus
not taxed.
CAPITAL - Capital can be carefully spent and managed - Profits may not be large enough for
- The owner may be able to borrow money expansion
from a financial institution, especially if they - Cannot appoint people with large
have assets that can be used as surety for a salaries
loan. - Owner responsible for any capital
borrowed
DIVISION OF - Owner receives all profits from the business - Owner needs to budget carefully so
PROFITS which can lead to capital growth that business debts are covered
- The owner may use profit to expand the - If the owner does not make a profit, the
business. income and livelihood of the owner
may be severely affected
- The owner is personally liable for the
loss of the business
LEGISLATION - It is easy and inexpensive to start - Unlimited liability
- Unlimited liability may encourage the - Personal debts and business debts are
owner to work harder to ensure the success not separated
of the business - Must comply with relevant municipal
- It is not compulsory to have financial regulations or it could close down
statements audited
FORMS OF OWNERSHIP
MEANING OF LIMITED LIABILITY AND UNLIMITED LIABILITY
MEANING OF LIMITED LIABILITY
• This is when shareholders are only liable for the amount that they invested in the company
• Example: If the business is bankrupt, the personal possessions of shareholders cannot be used to pay for the
debt of the business
MEANING OF UNLIMITED LIABILITY
• This is when the owner(s) are personally responsible for all the debts of the business
• Example: If the business is declared bankrupt, the personal possessions of the sole trader and partners may
be sold to pay off the debts of the business
CHARACTERISTICS OF EACH FORM OF OWNERSHIP
1) SOLE TRADER/ PROPRIETOR
DEFINITION
• A sole trader is a business that is owned and managed by one person
• The business owner handles everything including the activities of the business, its processes, and decisions
• It is most suitable for service businesses such as a doctor, hairdresser, electrician etc
CHARACTERISTICS
- Owner can sell the business to anyone at any time
- There are no legal requirements regarding the name of the business
- It is easy to establish as there are no legal formalities in forming the business
- Sole traders are not compelled by law to audit financial statements
- A sole trader has limited company for expansion and lacks continuity of existence
- Personal interest in the management - limited company for expansion and lacks continuity of existence
- Unlimited liability - owner is personally liable for the debt
IMPACT OF A SOLE TRADER
ADVANTAGES
No legal process and requirements
Simple management structure
All profits belong to the owner
Requires little capital to start
The assets of the business belong to the owner personally
DISADVANTAGES
Not a legal entity and no continuity
It is not always possible to pay high salaries
Growth of business can be restricted due to lack of capital
If the owner does not have enough knowledge or experience the business may fail
Difficult to attract highly skilled and knowledgeable employees
, CRITERIA THAT CONTRIBUTE TO THE SUCCESS AND/OR FAILURE OF A SOLE TRADER
FACTOR SUCCESS FAILURE
CAPACITY - Easy to control since it is a small business - Difficult to continue and grow long term
- Difficult to get good, well-trained staff
as they are expensive
- Owner has to manage and carry out all
business functions
MANAGEMENT - One owner so there are no disagreements - Owner has to do all the administration,
- Can make quick decisions without having to management, and decision-making in
consult others the business
- Owners has to rely on own decisions
and could make incorrect ones
TAXATION - Owner only taxed on profits in personal - If profits get too big may end up paying
capacity high tax in personal capacity
- Depending on how much income the owner - Failure by the owner to comply with
earns, his/her tax rate may be lower than personal income tax regulations could
the company tax rate lead to substantial financial penalties
- If the owner earns below a certain imposed by SARS
threshold amount per year, no income tax is
payable, and the business’s profits are thus
not taxed.
CAPITAL - Capital can be carefully spent and managed - Profits may not be large enough for
- The owner may be able to borrow money expansion
from a financial institution, especially if they - Cannot appoint people with large
have assets that can be used as surety for a salaries
loan. - Owner responsible for any capital
borrowed
DIVISION OF - Owner receives all profits from the business - Owner needs to budget carefully so
PROFITS which can lead to capital growth that business debts are covered
- The owner may use profit to expand the - If the owner does not make a profit, the
business. income and livelihood of the owner
may be severely affected
- The owner is personally liable for the
loss of the business
LEGISLATION - It is easy and inexpensive to start - Unlimited liability
- Unlimited liability may encourage the - Personal debts and business debts are
owner to work harder to ensure the success not separated
of the business - Must comply with relevant municipal
- It is not compulsory to have financial regulations or it could close down
statements audited
