CHAPTER 3
THE LEGAL FORM OF OWNERSHIP
INTRODUCTION TO THE LEGAL FORM OF OWNERSHIP
• An entrepreneur can conduct business through various forms of enterprise.
• An enterprise is an organisational structure through which business is conducted.
• There are many issues that should be considered when deciding on the form of ownership.
• These issues include the extent to which the entrepreneur wants to be liable for financial and
legal risk; who will have a controlling interest in the business; and how the business will be
financed.
• One of the first issues facing an entrepreneur about to enter a business undertaking is the
selection of the type of enterprise. This decision can have a tremendous impact on almost
every aspect of the business.
• knowledge of the different enterprise forms is crucial in planning for the possible future growth,
or transfer, of a business.
• Knowledge of the various forms of business is imperative for the entrepreneur. Considerations
include the size of the business, the nature of the proposed business activities, the participation
style, the management structure, the financing needs, the accountability of participants, and tax
and legal implications.
• The key to choosing the 'right' form of ownership lies in understanding the features of each
enterprise and how it will influence an entrepreneur's specific business and personal
circumstances.
• A characteristic of the business form that can be considered decisively beneficial for one
business may be viewed as a distinct drawback in another business. Although there is no best
form of enterprise, there may well be one form best suited to each entrepreneur's specific
circumstances.
• The characteristics of each of the enterprise forms will be explained with reference to several
key considerations: independence, liability, control, compliance, taxation and transferability.
CONSIDERATIONS WHEN CHOOSING A FORM OF ENTERPRISE
• The enterprise will have a legal (or juristic) personality. A legal or juristic person exists
independently of its members. It is recognised as a legal subject alongside natural persons or
individuals. It has its own rights, assets and obligations, its existence is not affected by changes
in its membership. This provides the business with continuity (also known as perpetual
existence). Therefore, the business could potentially exist forever.
• The members are usually not liable for the debts or obligations of the juristic person.
• Members enjoy limited liability, and they usually stand to lose only the capital they have
contributed to the entity.
• Only in exceptional circumstances will participants be held personally liable for the debts of a
business that offers the benefit of limited liability.
• Limited liability means the protection afforded by the juristic person to its members or owners in
the event of it being sued.
• However, despite the fact that limited liability is closely associated with separate legal
personality, it is not an automatic consequence of being a juristic person. An exception to the
rule that juristic personality provides limited liability is the personal liability company. In this
, special type of company that is recognised by the Companies Act (No. 71 of 2008), directors
and previous directors of the company are liable for payment of all contractual debts incurred
during their terms of appointment as directors.
• Conversely, even though trusts including business trusts) are generally not considered to be
juristic persons as trust assets are held in the trustee's personal estate, trusts do enjoy limited
liability in the sense that only the assets in the trust estate according to the trust deed are used
to settle trust debts.
• Although a partnership is recognised as a 'person' who is eligible for registration as a vendor
for purposes of the Value Added Tax Act (No. 89 of 1991), they are not generally recognised as
juristic persons.
• during a partnership's existence, partners can only be held jointly liable for the debts of the
business.
• When judgment is taken against a partnership, sales in execution of judgment are usually
affected against partnership assets before the partners' personal estates. If a partnership is
sequestrated, the personal estates of partners are also dealt with separately from the
partnership estate in payment of the debts of the partnership for so far as this is possible. In
other words, a (temporary) measure of restricted personal liability is provided for during the
existence of a partnership despite the absence of juristic personality.
• Companies, close corporations and co-operative societies are juristic persons, while sole
proprietorships and partnerships are not. In trusts, the position is more complicated. Generally,
trusts are not viewed as juristic persons.
• The extent of the liability of the business owner is a very important consideration.
• The members or shareholders of companies, members of close corporations, and participants
in co-operative societies are usually not liable for the debts of the enterprise.
• Sole proprietors and partners are liable in their personal capacities for the debts of the
business.
• The trustee or beneficiary of a business trust is, in principle, not liable for the payments of trust
debts.
• The trustee is considered to have two separate estates: one being his or her personal estate,
and one for the trust assets. Trust debts are usually paid out of the separate trust estate only.
• The degree of control or management authority the entrepreneur will be able to exercise over
the activities of the business is another factor to consider.
• A sole proprietor enjoys total management autonomy with respect to the business he or she
owns.
• Companies are characterised by a formal division between ownership and control:
o The participative management structures of partnerships,
o co-operative societies and close corporations fall in between these two.
• A business trust is administered or managed by the trustee,
• The trust deed can apportion control between the trustee, the establisher of the business trust
(the founder) and the trust beneficiaries.
• Also of relevance is the potential for capital acquisition.
• Some businesses are extremely capital intensive.
• In other businesses, capital may be of lesser importance owing to the business activities
involved.
• A public company is ideally suited to raise large sums of capital.
, • In other enterprise forms, like partnerships, close corporations and co-operative societies, the
capital is provided by a limited number of persons and their own financial positions are
important.
• Factors including the number of participants, their exposure to risk and their say in the
management play a role in financing decisions.
• Compliance with legal formalities and regulations can impose a considerable administrative
and financial burden on an enterprise.
• Taxation is an important consideration.
• All forms of business enterprises must pay taxes. The rates for income tax, capital-gains tax
and transfer duty vary depending on the kind of taxpayer. The amount of tax to be paid
depends on whether the business is owner-operated or whether the business is a registered
entity that has its own separate juristic personality.
• This tax is payable instead of corporate income tax, capital gains and dividends tax.
• However, a non-profit organisation or nonprofit company (NPC) does not automatically qualify
for preferential tax treatment.
• Close corporations and co-operative societies are also liable to pay corporate tax at this flat
rate.
• Instead of the secondary tax on companies (STC), which used to be payable at a rate of ten
per cent on the net dividends distributed to members, a withholding tax on dividends (dividend
tax) is currently payable at a rate of 15 percent on the gross amount of all dividends.
• Capital gains tax is charged on the net capital gain after certain permissible deductions. Certain
exclusions apply for individual taxpayers, including permissible deductions in respect of gains
or losses resulting from the sale of a primary residence, retirement benefits and payments for
long-term insurance.
• Shares in public companies, especially if they are listed on an exchange, are very easily
transferable and the most liquid form of investment in a business.
• In private companies, close corporations and co-operative societies the transfer of an interest is
dependent on the approval of the remaining participants or members.
• Beneficiaries of a business trust may transfer their rights in accordance with the trust deed.
• A change in membership of a partnership has the effect of terminating the partnership.
• When establishing a small business there is a list of aspects to consider that could mean the
difference between success and failure. This list includes the following:
o Availability of raw materials. If the small business is dependent on raw materials, it
makes sense for the business to locate near to the source of this material.
o Proximity to the target market. In the convenience sector that includes fast food
franchising, it is necessary for the business to be near to its customers. Linked to this
proximity is developing customer loyalty so that customers keep coming back to buy
from the business.
o Availability of basic infrastructure. The availability of services such as water, electricity
and sanitation has been taken for granted, but there are indications that small
businesses need to reconsider their dependence on third-level government institutions
providing these services.
o Economic policy. Economic policy and local government incentives may be a motivator
for selecting a certain location.
THE LEGAL FORM OF OWNERSHIP
INTRODUCTION TO THE LEGAL FORM OF OWNERSHIP
• An entrepreneur can conduct business through various forms of enterprise.
• An enterprise is an organisational structure through which business is conducted.
• There are many issues that should be considered when deciding on the form of ownership.
• These issues include the extent to which the entrepreneur wants to be liable for financial and
legal risk; who will have a controlling interest in the business; and how the business will be
financed.
• One of the first issues facing an entrepreneur about to enter a business undertaking is the
selection of the type of enterprise. This decision can have a tremendous impact on almost
every aspect of the business.
• knowledge of the different enterprise forms is crucial in planning for the possible future growth,
or transfer, of a business.
• Knowledge of the various forms of business is imperative for the entrepreneur. Considerations
include the size of the business, the nature of the proposed business activities, the participation
style, the management structure, the financing needs, the accountability of participants, and tax
and legal implications.
• The key to choosing the 'right' form of ownership lies in understanding the features of each
enterprise and how it will influence an entrepreneur's specific business and personal
circumstances.
• A characteristic of the business form that can be considered decisively beneficial for one
business may be viewed as a distinct drawback in another business. Although there is no best
form of enterprise, there may well be one form best suited to each entrepreneur's specific
circumstances.
• The characteristics of each of the enterprise forms will be explained with reference to several
key considerations: independence, liability, control, compliance, taxation and transferability.
CONSIDERATIONS WHEN CHOOSING A FORM OF ENTERPRISE
• The enterprise will have a legal (or juristic) personality. A legal or juristic person exists
independently of its members. It is recognised as a legal subject alongside natural persons or
individuals. It has its own rights, assets and obligations, its existence is not affected by changes
in its membership. This provides the business with continuity (also known as perpetual
existence). Therefore, the business could potentially exist forever.
• The members are usually not liable for the debts or obligations of the juristic person.
• Members enjoy limited liability, and they usually stand to lose only the capital they have
contributed to the entity.
• Only in exceptional circumstances will participants be held personally liable for the debts of a
business that offers the benefit of limited liability.
• Limited liability means the protection afforded by the juristic person to its members or owners in
the event of it being sued.
• However, despite the fact that limited liability is closely associated with separate legal
personality, it is not an automatic consequence of being a juristic person. An exception to the
rule that juristic personality provides limited liability is the personal liability company. In this
, special type of company that is recognised by the Companies Act (No. 71 of 2008), directors
and previous directors of the company are liable for payment of all contractual debts incurred
during their terms of appointment as directors.
• Conversely, even though trusts including business trusts) are generally not considered to be
juristic persons as trust assets are held in the trustee's personal estate, trusts do enjoy limited
liability in the sense that only the assets in the trust estate according to the trust deed are used
to settle trust debts.
• Although a partnership is recognised as a 'person' who is eligible for registration as a vendor
for purposes of the Value Added Tax Act (No. 89 of 1991), they are not generally recognised as
juristic persons.
• during a partnership's existence, partners can only be held jointly liable for the debts of the
business.
• When judgment is taken against a partnership, sales in execution of judgment are usually
affected against partnership assets before the partners' personal estates. If a partnership is
sequestrated, the personal estates of partners are also dealt with separately from the
partnership estate in payment of the debts of the partnership for so far as this is possible. In
other words, a (temporary) measure of restricted personal liability is provided for during the
existence of a partnership despite the absence of juristic personality.
• Companies, close corporations and co-operative societies are juristic persons, while sole
proprietorships and partnerships are not. In trusts, the position is more complicated. Generally,
trusts are not viewed as juristic persons.
• The extent of the liability of the business owner is a very important consideration.
• The members or shareholders of companies, members of close corporations, and participants
in co-operative societies are usually not liable for the debts of the enterprise.
• Sole proprietors and partners are liable in their personal capacities for the debts of the
business.
• The trustee or beneficiary of a business trust is, in principle, not liable for the payments of trust
debts.
• The trustee is considered to have two separate estates: one being his or her personal estate,
and one for the trust assets. Trust debts are usually paid out of the separate trust estate only.
• The degree of control or management authority the entrepreneur will be able to exercise over
the activities of the business is another factor to consider.
• A sole proprietor enjoys total management autonomy with respect to the business he or she
owns.
• Companies are characterised by a formal division between ownership and control:
o The participative management structures of partnerships,
o co-operative societies and close corporations fall in between these two.
• A business trust is administered or managed by the trustee,
• The trust deed can apportion control between the trustee, the establisher of the business trust
(the founder) and the trust beneficiaries.
• Also of relevance is the potential for capital acquisition.
• Some businesses are extremely capital intensive.
• In other businesses, capital may be of lesser importance owing to the business activities
involved.
• A public company is ideally suited to raise large sums of capital.
, • In other enterprise forms, like partnerships, close corporations and co-operative societies, the
capital is provided by a limited number of persons and their own financial positions are
important.
• Factors including the number of participants, their exposure to risk and their say in the
management play a role in financing decisions.
• Compliance with legal formalities and regulations can impose a considerable administrative
and financial burden on an enterprise.
• Taxation is an important consideration.
• All forms of business enterprises must pay taxes. The rates for income tax, capital-gains tax
and transfer duty vary depending on the kind of taxpayer. The amount of tax to be paid
depends on whether the business is owner-operated or whether the business is a registered
entity that has its own separate juristic personality.
• This tax is payable instead of corporate income tax, capital gains and dividends tax.
• However, a non-profit organisation or nonprofit company (NPC) does not automatically qualify
for preferential tax treatment.
• Close corporations and co-operative societies are also liable to pay corporate tax at this flat
rate.
• Instead of the secondary tax on companies (STC), which used to be payable at a rate of ten
per cent on the net dividends distributed to members, a withholding tax on dividends (dividend
tax) is currently payable at a rate of 15 percent on the gross amount of all dividends.
• Capital gains tax is charged on the net capital gain after certain permissible deductions. Certain
exclusions apply for individual taxpayers, including permissible deductions in respect of gains
or losses resulting from the sale of a primary residence, retirement benefits and payments for
long-term insurance.
• Shares in public companies, especially if they are listed on an exchange, are very easily
transferable and the most liquid form of investment in a business.
• In private companies, close corporations and co-operative societies the transfer of an interest is
dependent on the approval of the remaining participants or members.
• Beneficiaries of a business trust may transfer their rights in accordance with the trust deed.
• A change in membership of a partnership has the effect of terminating the partnership.
• When establishing a small business there is a list of aspects to consider that could mean the
difference between success and failure. This list includes the following:
o Availability of raw materials. If the small business is dependent on raw materials, it
makes sense for the business to locate near to the source of this material.
o Proximity to the target market. In the convenience sector that includes fast food
franchising, it is necessary for the business to be near to its customers. Linked to this
proximity is developing customer loyalty so that customers keep coming back to buy
from the business.
o Availability of basic infrastructure. The availability of services such as water, electricity
and sanitation has been taken for granted, but there are indications that small
businesses need to reconsider their dependence on third-level government institutions
providing these services.
o Economic policy. Economic policy and local government incentives may be a motivator
for selecting a certain location.
