Benefits of a Company Over Other Forms of Ownership Grade 11 Business Studies Activities

Benefits of a Company Over Other Forms of Ownership Grade 11 Business Studies Activities

Benefits of a Company Over Other Forms of Ownership Grade 11 Business Studies Activities:

When comparing a company to other forms of ownership, such as sole proprietorships and partnerships, there are several key benefits that stand out:

1. Raising Capital:

  • Company: Companies can raise more capital by selling shares to numerous investors. Imagine a company like Apple, which has thousands of shareholders worldwide.
  • Sole Proprietorship: A sole proprietor relies mostly on personal savings and loans. Think of a small local bakery owned by one person, using their savings to start the business.
  • Partnership: Partnerships can pool resources from a few partners, but still have limited capital compared to companies. Consider a law firm started by a few friends pooling their money together.

2. Continuity of Existence:

  • Company: A company has continuity of existence, meaning it continues to exist even if the owners change. For example, if a shareholder of Coca-Cola sells their shares, the company keeps running smoothly.
  • Sole Proprietorship: If the owner retires or passes away, the business typically ends. Think of a family-owned store that closes when the owner retires.
  • Partnership: The business might dissolve if one partner leaves, unless there are agreements in place. Imagine a small consulting firm where one partner decides to leave; this could complicate things.

3. Limited Liability:

  • Company: Shareholders have limited liability, meaning they are only liable for the amount they invested. If a company goes bankrupt, shareholders only lose the money they invested, not personal assets.
  • Sole Proprietorship: The owner has unlimited liability and is personally responsible for all debts. If a sole proprietor’s business fails, they might have to sell personal assets like their car or house to pay off debts.
  • Partnership: Partners usually have unlimited liability and can be personally responsible for business debts. If a partnership goes into debt, each partner might need to pay from their personal savings.

4. Management and Decision Making:

  • Company: Companies have a board of directors for effective management and decision-making. Large companies like Microsoft have a board that oversees all major decisions, ensuring professional management.
  • Sole Proprietorship: The owner makes all decisions, which can be efficient but also overwhelming. A sole proprietor runs their business single-handedly, making all the calls but also bearing all the stress.
  • Partnership: Decisions are made jointly by partners, which can lead to conflicts. In a partnership, partners must agree on major decisions, and disagreements can slow down progress.

5. Taxation:

  • Company: Companies often benefit from a fixed tax rate on profits, which can be advantageous. Companies like Google pay corporate taxes at a fixed rate, allowing for better financial planning.
  • Sole Proprietorship: Owners pay personal income tax on business profits, which can be higher than corporate tax rates. A freelance graphic designer pays taxes based on their personal income bracket, which might be higher.
  • Partnership: Partners pay personal income tax on their share of the profits, similar to sole proprietorships. Each partner in a small architectural firm pays taxes on their share of the profits according to their income tax rates.

Examples:

  • Company vs. Sole Proprietorship: If a tech startup (company) and a freelance web developer (sole proprietorship) both seek investment, the startup can issue shares to attract investors, while the freelancer must rely on personal savings or loans.
  • Company vs. Partnership: A large retail chain (company) can continue operating smoothly even if key managers leave, thanks to its structured management and continuity. In contrast, a local boutique run by a few partners might face challenges if one partner decides to leave or retire.

The Benefits and Challenges of Establishing a Company Versus Other Forms of Ownership

Benefits:

  • More Owners, More Capital: When a company has more owners, it can raise more capital. Think of it like having more friends pitch in to buy a really big pizza – you can afford a bigger one!
  • Expansion and Growth: With more capital, a company has a greater chance of expanding and growing. Imagine starting with a small store and eventually opening many branches!
  • Effective Management: Shareholders appoint a board of directors, which leads to more effective management. It’s like having a team of experts making important decisions instead of just one person.
  • Separate Legal Entity & Continuity: A company is a separate legal entity and has continuity of existence, meaning it continues to exist even if owners change. Think of it as a bus that keeps going no matter who’s driving.
  • Fixed Rate on Company Tax: Profit on company tax is paid at a fixed rate, making financial planning easier.

Challenges:

  • Expensive and Complicated Formation: Forming a company can be expensive and complicated. It’s like organizing a massive event; there’s a lot to handle!
  • Many Legal Requirements: There are many legal requirements to comply with. Imagine having a long list of rules you must follow to play a game.
  • Risk of Incompetent Directors: If the directors are not competent, shareholders’ investments may be at risk. It’s like having a bad coach; the team might not perform well.

The Formation of Companies

Registration:

  • The Memorandum of Association must be drawn up and filed along with the Notice of Incorporation with the Companies and Intellectual Property Commission.

The Six Steps in Forming a Company:

  1. Reserve Company Name: The company name is reserved, and fees are paid to the Registrar of Companies and Intellectual Property Commission.
  2. Certificate to Commence Business: Submit the certificate to commence business with the formation documents.
  3. Open a Bank Account: The company opens a bank account.
  4. Register for Taxes: Register for income tax, VAT, and employee withholding tax with the local Receiver of Revenue.
  5. Register for UIF: Register for UIF with the Department of Labour.
  6. Register with COIDA: Register with the commissioner for the Compensation for Occupational Injuries and Diseases Act (COIDA).

The Company’s Charter – Memorandum and Articles of Association:

  • Memorandum of Association: Defines the scope of the company and includes:
    • Company’s name
    • Address of the registered office
    • Statement of limited liability of shareholders
    • Amount of share capital
    • Purpose of the company
  • Articles of Association: Indicates internal management regulations, including:
    • Names of directors and their roles
    • Distribution of profits
    • Internal rules for running the company
    • Meetings
    • Voting rights of shareholders

3.3 The Prospectus:

  • A prospectus is a written invitation issued to the public offering shares/securities in exchange for money. It must convince the public to buy shares and includes:
    • Purpose of the offer
    • Share capital
    • Shares issued
    • Property owned
    • Preliminary expenses
    • Amounts due to the promoters
    • Particulars of shares
    • Minimum subscription
    • Name of the company, incorporation, and commencement details

3.4 Underwriting:

  • Underwriting ensures that the minimum subscription is met by having a bank or financial institution guarantee to buy any unsold shares. This ensures:
    • The minimum subscription will be sold
    • The business can commence as a public company

Remember this during exams: Companies offer more potential for growth and stability, but they also come with more complexity and legal requirements. Always weigh the benefits against the challenges!

Questions and Answers Activity

Questions and Answers Activity Based on Benefits of a Company Over Other Forms of Ownership

1. What is one key benefit of a company in terms of raising capital?

A company can raise more capital by selling shares to numerous investors, allowing for greater financial resources compared to sole proprietorships or partnerships.

2. True or False: A sole proprietorship can easily continue to operate if the owner retires or passes away.

False. If the owner of a sole proprietorship retires or passes away, the business typically ends.

3. Describe the concept of limited liability in a company.

In a company, shareholders have limited liability, meaning they are only liable for the amount they invested. This protects their personal assets from being used to pay off company debts.

4. Name three factors that contribute to the effective management of a company.

  1. Board of Directors: Ensures professional management.
  2. Structured Decision-Making: Allows for informed and strategic decisions.
  3. Delegation of Duties: Responsibilities are divided among experienced managers.

5. How does continuity of existence benefit a company?

Continuity of existence means a company can continue operating even if ownership changes, ensuring stability and longevity.

6. True or False: Partners in a partnership have unlimited liability.

True. Partners usually have unlimited liability and can be personally responsible for business debts.

7. Explain how taxation works for a sole proprietorship.

In a sole proprietorship, the owner pays personal income tax on business profits, which can be higher than corporate tax rates.

8. How would you compare the management structure of a company to that of a partnership?

A company has a board of directors that oversees management, providing structured and effective decision-making. In contrast, a partnership relies on joint decision-making by partners, which can lead to conflicts and slower decision processes.

9. Name and describe the six steps in forming a company.

  1. Reserve Company Name: Register and pay fees for the company name with the Companies and Intellectual Property Commission.
  2. Certificate to Commence Business: Submit the certificate with formation documents.
  3. Open a Bank Account: Establish a bank account for company transactions.
  4. Register for Taxes: Register for income tax, VAT, and employee withholding tax with the local Receiver of Revenue.
  5. Register for UIF: Register for UIF with the Department of Labour.
  6. Register with COIDA: Register with the commissioner for the Compensation for Occupational Injuries and Diseases Act.

10. True or False: A company’s articles of association define the scope and purpose of the company.

False. The memorandum of association defines the scope and purpose of the company, while the articles of association detail the internal management regulations.

11. Describe the purpose of a prospectus in a company.

A prospectus is a written invitation issued to the public offering shares or securities in exchange for money, aiming to convince the public to invest in the company by providing detailed information about the offer.

12. What is the minimum subscription, and why is it important?

The minimum subscription is the amount of shares that must be sold to cover the costs of launching a company and any initial expenses. It ensures that a public company has enough capital to commence business operations.

13. How does underwriting benefit a company during its formation?

Underwriting ensures that the minimum subscription is met by having a bank or financial institution guarantee to buy any unsold shares, allowing the business to commence as a public company.

14. True or False: A company must register for income tax, VAT, and employee withholding tax with the local Receiver of Revenue.

True. Registering for these taxes is one of the required steps in forming a company.

15. Compare the risk of personal asset loss between a sole proprietorship and a company.

In a sole proprietorship, the owner has unlimited liability and risks personal assets to cover business debts. In a company, shareholders have limited liability, protecting their personal assets from being used to pay off company debts.

16. Describe the internal rules for running a company as indicated in the articles of association.

The articles of association include internal management regulations such as:

  • Names of the directors and their roles
  • How profits will be distributed
  • Internal rules for running the company
  • Procedures for meetings
  • Voting rights of shareholders

17. True or False: Sole proprietors and partners pay taxes based on their personal income tax rates.

True. Both sole proprietors and partners pay taxes based on their personal income tax rates, which can vary.

18. How does a company ensure continuity of existence?

A company ensures continuity of existence by being a separate legal entity that continues to operate regardless of changes in ownership, unlike sole proprietorships or partnerships.

19. What is one challenge companies face that sole proprietorships and partnerships do not?

Companies face expensive and complicated formation procedures that are not typically encountered by sole proprietorships or partnerships.

20. True or False: A company’s shareholders are personally responsible for company debts.

False. Shareholders have limited liability and are not personally responsible for company debts beyond their investment in shares.

21. Describe the role of a board of directors in a company.

The board of directors is appointed by shareholders to manage the company, make strategic decisions, and ensure effective governance and oversight.

22. What is one advantage of having more owners in a company?

Having more owners allows a company to raise more capital, facilitating expansion and growth opportunities.

23. True or False: Partnerships have more legal requirements than companies.

False. Companies generally have more legal requirements to comply with compared to partnerships.

24. Explain how a company’s fixed tax rate on profits benefits financial planning.

A company’s fixed tax rate on profits provides predictability and stability in financial planning, allowing for more accurate forecasting and budgeting.

25. Compare the process of decision-making in a company to that in a sole proprietorship.

In a company, decisions are made by a board of directors, ensuring a collective and strategic approach. In a sole proprietorship, the owner makes all decisions, which can be efficient but may also lead to a lack of diverse perspectives.

26. True or False: The memorandum of association includes the company’s internal management rules.

False. The articles of association include the company’s internal management rules, while the memorandum of association defines the company’s scope and purpose.

27. Describe the steps a company must take to register for UIF.

A company must register for UIF (Unemployment Insurance Fund) with the Department of Labour as part of its formation process.

28. How would you explain the concept of underwriting to a potential investor?

Underwriting involves a bank or financial institution guaranteeing to buy any unsold shares to ensure the company meets its minimum subscription requirement, providing security that the company will have enough capital to start operations.

29. True or False: A company’s articles of association state the limited liability of shareholders.

False. The memorandum of association states the limited liability of shareholders, while the articles of association detail the company’s internal management.

30. Explain the importance of the minimum subscription in a public company.

The minimum subscription is crucial because it ensures that a public company has raised enough capital to cover initial expenses and launch operations, providing a financial foundation for the business.

Case Study Questions Based in South Africa

Case Study 1: Establishing a Tech Startup in Cape Town

Background: Sipho and Thandi are entrepreneurs in Cape Town who have a passion for technology and innovation. They decide to start a tech company that develops mobile applications for local businesses. They plan to raise capital by selling shares to investors and want to ensure that their company has the potential to grow and expand rapidly.

Questions:

How should Sipho and Thandi proceed with the formation of their company to ensure they can raise sufficient capital and benefit from continuity of existence?

Answer: Sipho and Thandi should follow these steps:

  • Reserve the Company Name: Register and pay the fees to the Companies and Intellectual Property Commission (CIPC).
  • Submit the Certificate to Commence Business: Along with the formation documents.
  • Open a Bank Account: Essential for managing company finances.
  • Register for Taxes: Including income tax, VAT, and employee withholding tax with the local Receiver of Revenue.
  • Register for UIF: With the Department of Labour.
  • Register with COIDA: Ensuring compliance with the Compensation for Occupational Injuries and Diseases Act.
By forming a company, they will benefit from the ability to raise capital through shares, enjoy continuity of existence regardless of changes in ownership, and have limited liability, protecting their personal assets.

What are the key benefits Sipho and Thandi can expect from establishing their tech startup as a company compared to forming a partnership or sole proprietorship?

Answer: Key benefits include:

  • More Capital: By selling shares, they can raise more capital than they would in a partnership or sole proprietorship.
  • Limited Liability: Shareholders’ liability is limited to their investment, protecting personal assets.
  • Effective Management: A board of directors can bring expertise and strategic decision-making.
  • Continuity of Existence: The company will continue to operate regardless of changes in ownership.
  • Fixed Tax Rate: Company profits are taxed at a fixed rate, aiding in financial planning. These benefits will provide Sipho and Thandi with a solid foundation to grow their tech startup efficiently and securely.

Case Study 2: Expanding a Family-Owned Retail Business in Johannesburg

Background: The Naidoo family owns a successful retail store in Johannesburg, operating as a sole proprietorship. They are considering expanding their business into a chain of stores across Gauteng province. To do this, they need substantial capital and are exploring the option of converting their sole proprietorship into a company.

Questions:

  1. What are the steps the Naidoo family should take to convert their sole proprietorship into a company, and how will this change benefit their expansion plans?Answer: The Naidoo family should:
    • Reserve the Company Name: Register with the Companies and Intellectual Property Commission (CIPC).
    • File the Memorandum of Association: Along with the Notice of Incorporation.
    • Submit the Certificate to Commence Business: With the necessary formation documents.
    • Open a Bank Account: For company transactions.
    • Register for Taxes: Including income tax, VAT, and employee withholding tax with the local Receiver of Revenue.
    • Register for UIF: With the Department of Labour.
    • Register with COIDA: For compliance with the Compensation for Occupational Injuries and Diseases Act.
    Benefits of converting to a company:
    • More Capital: Ability to raise funds by selling shares to investors.
    • Limited Liability: Protects the family’s personal assets.
    • Effective Management: A board of directors can bring professional management and strategic planning.
    • Continuity of Existence: Ensures business stability regardless of ownership changes. These steps and benefits will support the Naidoo family’s expansion plans by providing financial resources, protecting personal assets, and ensuring professional management.
  2. Compare the challenges the Naidoo family might face when converting their sole proprietorship into a company versus the challenges they would face if they chose to expand as a partnership.Answer: Challenges in Converting to a Company:
    • Formation Costs: Higher costs and complexity in setting up a company.
    • Legal Requirements: Compliance with numerous legal and regulatory requirements.
    • Management Structure: Adjusting to a formal board of directors and structured management.
    Challenges in Expanding as a Partnership:
    • Limited Capital: Difficulty in raising significant capital compared to selling shares in a company.
    • Unlimited Liability: Partners’ personal assets are at risk for business debts.
    • Decision-Making Conflicts: Potential for disagreements and conflicts among partners, slowing down decision-making.
    By converting to a company, the Naidoo family will face higher initial setup costs and more regulatory compliance but will benefit from increased capital, limited liability, and effective management. Expanding as a partnership may seem simpler initially but poses significant risks and limitations in terms of capital and personal liability.

Related Posts