AUE1501 - Introduction To Auditing Study Notes Summary.

AUE1501 - Introduction To Auditing Study Notes Summary. VARIOUS BUSINESS ENTITIES The Department of Trade and Industry in South Africa recognises that a business can be operated through certain types of legal entities. In this study unit, we are going to look at each of the following types of business entities: • Sole proprietor • Partnership • Close corporation • Company ACTIVITY Go and open the following link and read about the legal issues of the different types of business entities. Think of the business that you have in mind and use the questions on that page to assist you in deciding on the most appropriate business entity. Notice the factors that you have to consider. AUE1501/1 13 STUDY UNIT 1: Various types of business entities DISCUSSION 1.1 E-tutor assistance required Consider the following questions and post your thoughts about any of them on the discussion forum provided for the purpose. If you do not post your own idea, you have to respond constructively to a post by another student. • What is the name of your business? • Which type of business entity will suit your business now? • If your business grows, which business entity will suit your new needs? We have taken your idea (business idea) and we have given it a body (legal entity)! In the the remainder of this study unit I will make reference to a useful document published by the South African Revenue Services (SARS): The South African Revenue Services (SARS), Tax Guide for Small Businesses: 2014/2015. If you wish to access it for additional reading, you can open the following link: Guide%20for%20Small%20Businesses%20-%20External%20G The above links allow us to identify some of the advantages and disadvantages of each type of business entity. Most businesses initially start off as a sole proprietor. As soon as the entrepreneur recognises that he/she needs more expertise or funds he/she might think in terms of a partnership or even a private company. 1.2.1 Sole proprietor According to The South African Revenue Services (SARS), Tax Guide for Small Businesses (2014/2015), a sole proprietorship is a business that is owned and operated by a natural person (individual). This is the simplest form of business entity. Only the proprietor has the authority to make decisions for the business. The proprietor assumes the risks of the business to the extent of all of his or her assets, whether used in the business or not. Like everything else in life, running an entity as a sole proprietor has advantages and disadvantages. These can be listed as follows: Sole proprietor: Advantages Disadvantages Simple to set up and manage A single owner has limited skills The owner is free to make his/her own decisions The owner can get business capital only as an individual There are few legal requirements for setting up All business debts are the owner’s responsibility 7KHRZQHUJHWVDOOWKHSUR¿WV It is not a separate legal entity It is easy to close down if you want to 14 TOPIC 1: THE BUSINESS WORLD AND CORPORATE GOVERNANCE 1.2.2 Partnership A partnership (or unincorporated joint venture) is the relationship existing between two or more persons who join together to carry on a trade, business or profession. A partnership is also not a separate legal person or taxpayer. Each SDUWQHULVWD[HGRQKLVRUKHUVKDUHRIWKHSDUWQHUVKLSSUR¿WVDQGPDFRQWULEXWH PRQHSURSHUWODERXURUVNLOOVDQGHDFKH[SHFWVWRVKDUHLQWKHSUR¿WVDQG losses of the partnership. It is similar to a sole proprietorship except that a group of owners replaces the sole proprietor. As is the case for a sole proprietorship a partnership also has advantages and disadvantages. (South African Revenue Services (SARS), Tax Guide for Small Businesses: 2014/2015) Partnership: Advantages Disadvantages • Simple to set up and manage • It is not a separate legal entity • ,WKDVJUHDWHU¿QDQFLDOVWUHQJWK than a sole proprietorship • Sharing the decision making can slow down the process • $OOWKHSDUWQHUV¶VNLOOVEHQH¿WWKH entity • All business debts are each partner’s responsibility • Each partner has a personal interest in the entity • Lower degree of business continuity as the partnership technically dissolves every time a partner joins or leaves the partnership • Number of partners restricted to 20 except in the case of certain professional partnerships such as accountants, attorneys, etc 1.2.3 Close corporation (CC) As mentioned in your prescribed textbook, Jackson & Stent (2016:3/67) the idea of a close corporation is that the members all work together for the good of the EXVLQHVV&ORVHFRUSRUDWLRQVZHUHDVLPSOL¿HGIRUPRIEXVLQHVV+RZHYHUZLWK the implementation of the Companies Act 2008, no new close corporations can be created. STUDY Jackson & Stent (2016:3/67) (1) INTRODUCTION Important to note when studying this section is that no new close corporations can be formed. The existing close corporations are still an acceptable business type, but no new ones can be formed. You can buy an existing close corporation. (2) IMPORTANT CHANGES TO THE CC ACT 1984 Jackson & Stent (2016:3/69): Part 1 Formation and juristic person AUE1501/1 15 STUDY UNIT 1: Various types of business entities Note from the studied information that a CC is a separate legal entity. A CC is similar to a private company. It is a legal entity with its own legal personality and perpetual succession and must register as a taxpayer in its own right. The CC has no share capital and therefore no shareholders. The owners of the CC are the members. Members do not hold shares in the CC and, therefore, they have a membership interest in the CC. This interest is expressed as a percentage. ACTIVITY 1.1 Answer the following questions: (1) Can you still form new close corporations in South Africa? (2) If a CC is converted to a company, how will the legal status of the CC be affected? (3) What are the advantages and disadvantages of a CC? SUGGESTED SOLUTION 1.1 Reference: Jackson & Stent (2016:3/69) (1) Currently in South Africa, no new close corporation may be established. The new Companies Act of 2008 provides that no new close corporation may be registered and that existing close corporations may be converted into companies or elects to remain as close corporations. (2) Such a conversion will affect the legal status of the close corporations as follows: • Members of the close corporation will be entitled to become shareholders in the converted company. • All assets, liabilities, rights and obligations of the close corporation will continue to be vested in the new company. • Any legal proceedings against or instituted by the close corporation may be continued. (3) Advantages and disadvantages of a CC (South African Revenue Services (SARS), Tax Guide for Small Businesses: 2014/2015) Close corporation: Advantages Disadvantages • Relatively easy to establish and operate • There is a restriction of a maximum of 10 members • Life of the business is perpetual, that is, it continues uninterrupted as members change • There are more legal requirements than for a sole proprietor or partnership • Members have limited liability • Transfer of ownership is easy • Fewer legal requirements than a private company 16 TOPIC 1: THE BUSINESS WORLD AND CORPORATE GOVERNANCE 1.2.4 COMPANY A company means a juristic person incorporated in terms of the Companies Act, a domesticated company, or a juristic person that is registered in terms of the Companies Act (Companies Act, No 71 of 2008). A company is therefore a separate legal entity. The following are advantages and disadvantages of a company (See South African Revenue Services (SARS), Tax Guide for Small Businesses: 2014/2015.) Company: Advantages Disadvantages • Life of the business is perpetual, that is, it continues uninterrupted as shareholders change • It is subject to many legal requirements • The shareholders loss is limited to the share capital contributed • 0RUHGLI¿FXOWDQGH[SHQVLYHWR establish and operate than other forms of ownership such as a sole proprietorship or partnership • Shareholders are not personally responsible for the entity’s debts • Transfer of ownership is relatively easy • It is adaptable for small, medium and large entities 1.3 CATEGORIES OF COMPANIES STUDY Jackson & Stent (2016:3/15): 2. Sec 8 – Categories of companies Using the above study reference a mind map (or a summary) of the different categories of companies is generated as follows: AUE1501/1 17 STUDY UNIT 1: Various types of business entities DIAGRAM 1: CATEGORIES OF COMPANIES (source: Jackson & Stent 2016:3/15) ACTIVITY 1.2 Refer to the above diagram. J & S refers to Jackson & Stent and the notes (f) and (e) are found on page 3/15. You are required to list the characteristics of a public and a personal company. ACTIVITY 1.3 /LVWIRXUFDWHJRULHVRISUR¿WFRPSDQLHVWKDWFDQEHIRUPHG SUGGESTED SOLUTION 1.3 A state-owned company REFLECTION 1.1 'LGRXNQRZWKDWWKHVWDWHRZQVFRPSDQLHVWKDWKDYHDSUR¿WPRWLYH" Google “South African state-owned enterprises” and list two examples. and Non- Profit Eskom Holding SOC Ltd Companies State owned Profit Public Private Personal Sasol Ltd Tau (Pty) Ltd Abed Inc Aidsrevive NPC Characteristics J&S Activity 1.5 J&S Activity 1.4 note(f) note(e) 18 TOPIC 1: THE BUSINESS WORLD AND CORPORATE GOVERNANCE ACTIVITY 1.4 ([SODLQWKHFKDUDFWHULVWLFVRIDQRQSUR¿WFRPSDQ SUGGESTED SOLUTION 1.4: ,QFRUSRUDWHGIRUZKRVHEHQH¿W" How may income and property be used? The company name ends with? ACTIVITY 1.5 Explain the characteristics of a private company. SUGGESTED SOLUTION 1.5: A private company has a Memorandum of Incorporation that prohibits restricts cannot be INTERNET ACTIVITY 1.2 Are you unsure what a Memorandum of Incorporation is? If your answer is “yes” then google: “Memorandum of Incorporation for South African companies” 1.4 SUMMARY AND SELF-ASSESSMENT In this study unit we had a look at the various types of entities as well as their advantages and disadvantages. We also had a look at the different categories of companies. Refer to your notes you made in your workbook when you completed the following activities. Activity 1.1 Discussion 1.1 6HOI5HÀHFWLRQ Internet Activity 1.1 Activity 1.2 Internet Activity 1.2 Activity 1.3 Activity 1.4 Activity 1.5 After having worked through the study unit and the study references, are you able to • explain the advantages and disadvantages of each type of business entity? • differentiate between the various categories of companies?