TLDR;
This video by Teacher Ilona Smith discusses the benefits of establishing a company versus other forms of ownership, such as sole proprietorships, partnerships, closed corporations, and public companies. It covers various aspects including legal status, liability, profit sharing, ownership, management, capital, cash flow, lifespan, continuity, and taxation. Additionally, the video addresses the challenges of establishing a company and outlines the procedures for company formation, legal requirements, and essential documents like the memorandum of incorporation and prospectus.
- Legal status and liability: Companies have their own legal status, protecting shareholders' assets through limited liability.
- Capital and cash flow: Companies can attract more investors and have better cash flow compared to sole traders.
- Lifespan and continuity: Companies offer continuity of existence, with shares that can be transferred, bought, or sold.
- Taxation: Companies may have tax benefits and rebates for social responsibility programs.
Introduction [0:00]
Teacher Ilona Smith introduces a discussion on the advantages of a company structure compared to other forms of business ownership, including private companies, partnerships, and sole traders. She references the textbook used to create the slides, ensuring that the information presented is accurate and consistent with business studies requirements.
Forms of Ownership [1:06]
Forms of ownership refer to the legal structure of a business and how it is owned. An entrepreneur must decide which form of ownership will best suit their type of business. There are eight forms of ownership, including profit and nonprofit companies.
Sole Trader [1:38]
A sole trader, also known as a sole proprietor, is the simplest form of business ownership where an individual is responsible for setting up and running a business. The sole trader manages all investments, risks, and returns alone, without employees. Legally, there is no separation between the business and the individual, meaning the owner is fully responsible for the business's debts, potentially using personal assets to cover them. There are no legal formalities required to start a sole trader business, although registering the business name is advisable.
Advantages of a Sole Trader [4:20]
The advantages of a sole trader include the ease of starting the business without administrative formalities, full control over business operations and decisions, and direct ownership of assets and profits. The management structure is simple, allowing for quick adaptation to customer needs, and there is personal contact between the owner and customers.
Disadvantages of a Sole Trader [5:13]
The disadvantages of a sole trader include the owner's skills, time, and energy being the only resources, the business's dependence on the owner's existence, limited capital, and unlimited liability. Cash flow can be problematic, growth is restricted due to lack of capital, and attracting skilled employees is difficult.
Partnership [6:23]
A partnership is owned and managed by two or more individuals who agree to set up and run a business together, sharing profits as per their agreement. Partners contribute skills, resources, or money, and the partnership is not a legal entity, meaning partners pay tax in their personal capacity. There are no legal requirements for the business name, but partners have unlimited liability for the business's debts.
Characteristics of a Partnership [6:41]
A partnership involves an agreement between two to six people, each contributing skills, resources, or money. Profits and losses are shared according to the partnership agreement. Partnerships are not legal entities, so partners pay tax in their personal capacity. There are no legal requirements regarding the business name. Partners have unlimited liability and are jointly liable for the business's debts.
Advantages of a Partnership [10:28]
The advantages of a partnership include shared responsibilities and contributions from all partners, making it easier to manage problems. Partnerships are easy to establish with minimal formalities, and partners can combine knowledge and skills to make better decisions. Workload and resources are shared, and partners pay tax in their personal capacity.
Disadvantages of a Partnership [12:10]
The disadvantages of a partnership include potential disagreements among partners, which can slow down decision-making. A bad decision by one partner can lead to losses for the entire partnership. The partnership dissolves if one partner dies or retires, and all partners have unlimited liability for the business's debts.
Close Corporation (CC) [14:03]
A Close Corporation (CC) is an optional association of one to ten members who qualify for membership. New CC registrations are no longer possible under the new companies act, but existing CCs may continue to trade. CCs are legal entities with their own rights and responsibilities.
Characteristics of a Close Corporation [15:11]
CCs are suitable for small to medium businesses and are legal entities with rights and responsibilities. They can have one to ten members who share a common goal and are involved in management. The name ends with the suffix CC. Members have unlimited liability unless the CC had more than ten members for over six months. CCs have their own legal personality and unlimited continuity.
Advantages of a Close Corporation [16:55]
The advantages of a CC include fewer legal requirements, legal entity status with continuity of existence, and the possibility of converting to a private company. Members have limited liability, and ownership interest does not need to be proportional to capital contribution.
Disadvantages of a Close Corporation [17:43]
The disadvantages of a CC include limited growth and expansion due to the member cap, personal liability for losses if a member's actions are incompetent, and potential requirements for audited financial statements when applying for loans. CCs are taxed as companies, which may be higher than personal tax rates, and it's difficult for members to leave.
Private Company [18:33]
A private company restricts the right of its members to transfer shares and does not invite the public to subscribe. It uses the term "Proprietary Limited" (Pty Ltd) in its name.
Characteristics of a Private Company [18:58]
A private company requires one or more directors and shareholders, with no limit on the number of shareholders. It is not allowed to sell shares to the public and must register with the register of companies by drawing up a memorandum of incorporation. Shareholders have limited liability for the debts of the business.
Advantages of a Private Company [21:14]
The advantages of a private company include the ability to raise more capital than an individual, good long-term growth opportunities, and limited liability for shareholders. It is a legal entity that can sign contracts in its own name and easily raise capital by issuing shares to its members.
Disadvantages of a Private Company [22:56]
The disadvantages of a private company include restrictions on raising funds directly from the public, costs and formalities associated with forming the company, and more taxation requirements than a sole trader. There is also the potential for double taxation on profits and dividends.
Personal Liability Company [24:19]
A personal liability company is a private company mainly used by associations such as lawyers, engineers, and accountants. The company name must end with the word "Incorporated" or "Inc." Directors are responsible for the debts of the company.
Characteristics of a Personal Liability Company [24:58]
A personal liability company requires one or more persons to incorporate and at least one director. It is subject to fewer disclosure and transparency requirements and is governed by the company's act. Directors are jointly liable for the company's debts.
Advantages of a Personal Liability Company [27:36]
The advantages of a personal liability company include fewer disclosure and transparency requirements, a continuous lifespan, and optional audited financial statements. Shareholders have the right to preempt new securities unless otherwise provided.
Disadvantages of a Personal Liability Company [29:00]
The disadvantages of a personal liability company include the difficulty and expense of establishing the company, the inability to sell shares to the public, and the potential for directors to act in their own interest. There is also the potential for double taxation.
Public Company [30:38]
A public company is registered to offer its stock and shares to the general public, typically through the Johannesburg Securities Exchange (JSE). The company's name needs to end with the letters LTD.
Characteristics of a Public Company [31:32]
A public company requires a minimum of one person to start, three or more directors and shareholders, and registration with the register of companies. It raises capital by issuing shares to the public and has legal personality with unlimited continuity.
Advantages of a Public Company [33:08]
The advantages of a public company include its own legal identity, no limitation on the number of shareholders, and the ability to appoint competent directors. It is easy to raise capital through the issuing of shares, and shareholders have limited liability.
Disadvantages of a Public Company [34:37]
The disadvantages of a public company include taxes paid on taxable income, a complicated process to incorporate, and the requirement to appoint an auditor, audit committee, and company secretary. Financial affairs must be known publicly, which could be used by competitors.
State-Owned Companies [36:06]
A state-owned company has the government as its major shareholder and falls under the Department of Public Enterprise. The name of a state-owned company must end with the letters SOC LTD.
Characteristics of a State-Owned Company [37:06]
A state-owned company requires three or more directors and one shareholder, and it is owned by the government and operated for profit. It has financial autonomy but depends on the government for initial investments.
Advantages of a State-Owned Company [38:59]
The advantages of a state-owned company include the use of profits to finance other state departments, the offering of essential services, and the creation of jobs for all skill levels.
Disadvantages of State-Owned Companies [39:34]
The disadvantages of state-owned companies include poor management, reliance on government subsidies, and a lack of incentive for employees to perform. Shares are not freely tradable, and strict regulations must be followed.
Nonprofit Companies [40:34]
A nonprofit company may register with the Department of Social Welfare as a nonprofit organization. The name of a nonprofit company must end with NPC.
Characteristics of a Nonprofit Company [41:16]
Nonprofit companies do make money but do not make a profit. Any money raised needs to be used to cover expenses.
Advantages of an NPC [42:13]
The advantages of an NPC include its independent legal personality, the continuation of existence even if membership changes, and the separation of assets and liabilities from those of its members. Profits can only be used to conduct the work of the organization.
Difference Between the Forms of Ownership [43:55]
When starting a business, it is important to choose the form of ownership that will be profitable. Each form of ownership functions differently, so it is important to evaluate each form carefully.
Benefits of Establishing a Company [44:48]
The benefits of establishing a company versus other forms of ownership include legal status and liability, profit sharing, ownership and management, capital and cash flow, long-term growth opportunities, lifespan and continuity, and taxation.
Challenges of Establishing a Company [47:52]
The challenges of establishing a company versus other forms of ownership include the expensive and complicated procedure, potential risks with shareholders' investments, and the possibility of conflict between owners and management.
Procedure for the Formation of Companies [49:58]
The procedure for the formation of companies includes determining the people establishing the company, preparing a memorandum of incorporation, opening a bank account, registering for taxation, filing a notice of incorporation, obtaining a unique registration number, drawing up a prospectus, and registering the company at the company's and intellectual property commission.
Legal Requirements of the Name of a Company [50:55]
The legal requirements of the name of a company include that it cannot be used by another company if reserved, it is subject to the approval of CIPC, it must be original and not misleading, it must appear on all company documents, and it must show the type of company.
Understanding the Memorandum of Incorporation, Notice of Incorporation, and the Prospectus [52:04]
Understanding the memorandum of incorporation, notice of incorporation, and the prospectus is essential for company formation. The memorandum of incorporation serves as the constitution of a company, while the prospectus is a written invitation to the public to buy shares.
Memorandum of Incorporation [52:10]
The memorandum of incorporation (MOI) serves as the constitution of a company, outlining the company's name, registered office, records, and the relationship between the business and its stakeholders. It details the rights, responsibilities, and duties of shareholders and directors, and includes information about the company's incorporation, number of directors, and share capital.
Notice of Incorporation [53:41]
The notice of incorporation must be lodged with the standard form of the memorandum of incorporation. It contains information such as the type of company, the financial year-end, the number of directors, the incorporation dates, the registered address, and the company name.
Prospectus [54:06]
A prospectus is a written invitation to the public to buy shares, also referred to as the company's securities. Before a company can be registered, it must approve that enough shares have been issued to cover the launching cost and essential initial expenses.
Meaning of Prospectus [54:45]
A prospectus is a written invitation to convince the public to buy shares, giving information about the business. It is a formal legal document giving details about the investment offerings.
Initial Public Offer (IPO) [55:10]
An Initial Public Offer (IPO) is when a company issues shares to the public for the first time. The company must produce a prospectus before undertaking the initial offering.
Second Offering [55:39]
A second offering is an offering of securities by a shareholder of the company as opposed to the company itself, which is the primary offering. It is the sale of new or closely held shares by a company that has already made the initial public offering.
Aspects Included in Prospectus [56:04]
Aspects that need to be included in a prospectus are the name of the company, the company overview, the product or service portfolio, market analysis and strategy, the management team, the risks and potential of the business, the available financial and share information, the company's assets and liabilities, financial position, profits and losses, cash flow, prospectus for growth, pre-incorporation contracts, date of registration, minimum subscription, preliminary expenses, property that's owned, shares issued, share capital, and the purpose of the offer.
Conclusion [57:04]
The video concludes with a mind map recap of the content covered, emphasizing the importance of understanding the different forms of ownership and their implications for business success. Teacher Ilona Smith thanks viewers for their support and encourages them to like the video and subscribe to the channel for more informative content.