Transcript Document

Grade 11
Business Environments and Business
Operations
Forms of Ownership
BENEFITS AND CHALLENGES OF ESTABLISHING A COMPANY VERSUS OTHER FORMS OF OWNERSHIP:
BEFEFITS OF ESTABLISHING A COMPANY VERSUS OTHER OWNERSHIP FORMS:
 More owners means a greater possibility for growth and
expansion because more capital and funds can be
contributed than in other forms of ownership.
 There can be more effective management as shareholders
appoint a board of directors to manage the business.
Decisions usually are not made by one person only, as in the
case of a sole proprietor.
 A company is registered as a legal entity and all companies,
with the exception of personal liability companies, offer
shareholders limited liability. This often motivates
shareholders to take more risks as their personal belongings
are not at risk.
BENEFITS AND CHALLENGES OF ESTABLISHING A COMPANY VERSUS OTHER FORMS OF OWNERSHIP:
BEFEFITS OF ESTABLISHING A COMPANY VERSUS OTHER OWNERSHIP FORMS:
 A company enjoys continuity of existence. This means any change
in the ownership of the business will not affect the existence of the
business, unlike in the case of a sole proprietor or a partnership.
 Profit companies pay a fixed tax rate of 28 % on profit and a
further 10 % STC on dividends declared to shareholders. The
fixed rate of 28 % is less than the progressive tax system of a
maximum rate of 40 % that applies to sole proprietors and
partners in a partnership.
BENEFITS AND CHALLENGES OF ESTABLISHING A COMPANY VERSUS OTHER FORMS OF OWNERSHIP:
CHALLENGES OF ESTABLISHING A COMPANY VERSUS OTHER OWNERSHIP FORMS:
 The formation procedures of a company (discussed in more detail
in the next section) are often more expensive and difficult than that
of a sole proprietor, partnership and close corporation, which all
are relatively easy and less expensive to start.
 Companies often have many legal requirements to adhere to,
which can be complicated and expensive for the business. For
example, financial statements must be audited and regular annual
general meetings must be held.
 If the directors (management) appointed by the shareholders are
not competent and do not manage the company well,
shareholders’ investments may be at risk.
BENEFITS AND CHALLENGES OF ESTABLISHING A COMPANY VERSUS OTHER FORMS OF OWNERSHIP:
BENEFITS OF STARTING A PUBLIC COMPANY VERSUS SOLE PROPRIETORSHIPS AND PARTNERSHIPS:
PUBLIC COMPANY:
SOLE PROPRIETORSHIPS AND
PARTNERSHIPS:
 Shareholders have limited liability for the
debt of the company.
 Owners of sole traders and partners in
partnerships have unlimited liability for
the debt of their business.
 Funds cannot be raised from the public.
Funds are limited to loans from a bank
and money saved by the owner or
partners.
 No continuity of existence.
 Tax rates of companies are usually lower
than personal tax rates – owners of sole
traders and partners in partnerships pay
tax in their personal capacities.
 Funds may be raised directly from the
public by offering securities to the public.
 Continuity of existence.
 Tax rates.
BENEFITS AND CHALLENGES OF ESTABLISHING A COMPANY VERSUS OTHER FORMS OF OWNERSHIP:
BENEFITS OF STARTING A COMPANY VERSUS CLOSE CORPORATIONS, PERSONAL LIABILITY COMPANIES AND
PRIVATE COMPANIES:
PUBLIC COMPANY:
CLOSE CORPORATIONS, PERSONAL
LIABILITY COMPANIES AND PRIVATE
COMPANIES:
 Funds may be raised directly from the
public by offering securities to the public.
 Funds may not be raised from the public,
but are restricted to what company
owners can borrow from the bank.
 More money can be raised by selling
securities to the public than by borrowing
from a bank.
 Companies can raise more capital
compared to other forms of businesses.
BENEFITS AND CHALLENGES OF ESTABLISHING A COMPANY VERSUS OTHER FORMS OF OWNERSHIP:
BENEFITS OF STARTING A COMPANY VERSUS CO-OPERATIVES:
PUBLIC COMPANY:
 The prices of the securities serve as a
barometer of the company’s
performance.
 Companies can raise more capital
compared to other forms of business
enterprise.
CLOSE CORPORATIONS, PERSONAL
LIABILITY COMPANIES AND PRIVATE
COMPANIES:
 Not as sensitive to commercial
considerations as a company.
 Not as effective at raising capital as a
company.
FORMATION OF COMPANIES:
The concept of securities
 Securities are a general term used for shares, bonds and
other forms of financial instruments that can be traded.
 The Johannesburg Securities Exchange (JSE) is an organisation
which controls the way in which securities are traded making
sure investment arrangements are legal.
FORMATION OF COMPANIES:
The concept of securities
 Equity securities (shares)
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A share is a part ownership of a company.
A company issues shares to raise capital.
The shares of most public companies can be freely bought and sold on the JSE.
A potential investor can only buy shares in a private company if they are invited
by existing shareholders.
Existing shareholders of a private company can only sell shares with the
permission of all the shareholders.
People who want to invest in shares need to do thorough investigation as to which
is the best company as there are always risks involved.
The new Companies Act 71 of 2008 protects people that invest in a company.
The Act has strict rules regarding companies giving the correct information to
prospective investors.
A company can have different types of shares.
Different types of shares have different conditions and rights.
FORMATION OF COMPANIES:
The concept of securities
 Equity securities (shares)
ORDINARY SHARES:
 These are basic, standard shares with no special rights.
 An ordinary shareholder will only receive dividends if the company
makes a profit and decides to pay dividends.
 These dividends will also vary.
 Ordinary shares have the potential to give the highest rewards
because large profits could result in high dividends.
 Unfortunately these shares also have the highest risk because ordinary
shareholders are the last to be paid if the company goes bankrupt.
FORMATION OF COMPANIES:
The concept of securities
 Equity securities (shares)
PREFERENCE SHARES:
 These are shares with special rights.
 Preference shareholders receive preferential treatment when
dividends are paid in that they receive dividends before ordinary
shareholders.
 Depending on the type of preference shares, dividends are fixed.
 This means preference shareholders will not receive a higher dividend
if company profits increase or a lower dividend if profits drop.
 These shares have a lower risk than ordinary shares because
preference shareholders are paid ahead of ordinary shareholders
when the company goes bankrupt.
 There are four types of preference shares.
FORMATION OF COMPANIES:
The concept of securities
 Equity securities (shares)
DIFFERENT TYPES OF PREFERENCE SHARES:
Cumulative PS:
Non-cumulative PS:
Participating PS:
Convertible PS:
If the company was
unable to pay
dividends for a
certain period, the
outstanding dividends
will accumulate and
be paid to the
shareholder when the
business is in a
position to do so.
Dividends that have
been missed during
a certain period will
not accumulate. The
company is not
liable to pay for the
dividends missed.
The shareholder
receives a higher
dividend if the
company
performs well
and shows high
profits.
The shareholder
can convert
(change)
preference
shares into
ordinary shares.
FORMATION OF COMPANIES:
The concept of securities
 Equity securities (shares)
FOUNDER’S SHARES:
 Shares issued to the founders of the company when the company startup.
 Founder’s shares often have special rights to dividends.
 These shares may be deferred ordinary shares which means that
dividends are only paid after all the other types of ordinary shares
have been paid.
 Founder’s shareholders often receive a larger share of the profit.
 Alternatively Founder’s shares could receive little or no dividends for a
fixed number of years and thereafter it would receive the same
dividends as ordinary shares.
FORMATION OF COMPANIES:
The concept of securities
 Equity securities (shares)
BONUS SHARES:
 These are free shares given to existing shareholders of a company.
 The number of bonus shares given to a shareholder will depend on the
number of shares the shareholder already owns in the company.
FORMATION OF COMPANIES:
The concept of securities
 Equity securities (shares)
REDEEMABLE SHARES:
 These are shares that the company will buy back in the future as
chosen by the company and or the shareholder.
 This means shareholders will get the money paid for the share paid
back to them.
 The company can choose the date or it can be at a fixed, agreed
upon date in the future.
FORMATION OF COMPANIES:
The concept of securities
 Debt securities
Debt securities are also instruments available to a company
to raise money from the public.
FORMATION OF COMPANIES:
The concept of securities
 Debt securities
BONDS:
 These are transferable certificates issued by a public company when
they borrow money from the public.
 It means the investor lends a certain amount of money to the company
for a certain number of years.
 The public company then promises to repay the borrowed money with
interest at fixed periods.
 Bonds are secured loans which mean the company promises specified
assets as security for the loan.
 In the case of the company going bankrupt, bond holders are paid
first. For this reason, bond holders receive lower interest rates
because of the lower risk.
 Bonds are listed and traded freely on the JSE.
FORMATION OF COMPANIES:
The concept of securities
 Debt securities
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DEBENTURES:
A debenture is a certificate issued by a company when borrowing money
form the public and is similar to a bond.
Debenture holders receive interest on their money periodically (monthly or
annually) as well as their money back at the end of the lending period.
Debentures are freely transferable just like shares and bonds and are
also traded on the JSE.
Debentures are higher risk investments because debentures are unsecured
loans which mean the loan is not secured by the physical assets of the
company.
In the case of the company going bankrupt, debenture holders cannot
claim the assets of the business in turn for money owed to them.
For this reason, debentures offer higher interest rates than bonds.
Some debentures can later be converted into shares.
FORMATION OF COMPANIES:
The concept of securities
Risk is the possibility of losing part or all of your initial
investment or the possibility of making a smaller return
than expected.
FORMATION OF COMPANIES:
Registration of companies
 Registering a company is a two-step process:
 Draw up a Memorandum of Incorporation (MOI)
 File it together with a Notice of Incorporation.
 These two documents need to be registered at the Companies and
Intellectual Property Commission (CIPC).
 Under the new Companies Act 71 of 2008, all companies must
convert their existing memorandum and articles of association to
an MOI.
 Forming a company in South Africa is a six-step process.
FORMATION OF COMPANIES:
Registration of companies
 Forming a company:
SIX STEPS REGARDING FORMING A COMPANY:
Step 1:
Reservation of the company name and payment of fees with the Registrar of
Companies, CIPC.
Step 2:
A certificate to commence business is submitted with the information
documentation. This is required by law before a company can trade or raise
finance.
Step 3:
The company needs to open a bank account.
Step 4:
Register for income tax, value added tax (VAT) and employee withholding tax
with the office of the local Receiver of Revenue.
Step 5:
Register for unemployment insurance (UIF) with the Department of Labour.
Step 6:
Register with the commissioner for Commissioner for Compensation for
Occupational Injuries and Diseases Act (COIDA).
FORMATION OF COMPANIES:
The company’s charter
 Memorandum of Incorporation:
 The most important document governing a company is the MOI.
 The MOI is a combination of the current memorandum and articles of
association of a company.
 The MOI is the ‘constitution’ of the business.
 Specific requirements for the content of an MOI are necessary to protect the
interests of shareholders in the company.
 They provide for a number of company rules and adjustable requirements.
 The company may accept or change these as required, as long as they are in
line with the Companies Act.
FORMATION OF COMPANIES:
The company’s charter
 Memorandum of Incorporation:
 The MOI contains the following information:
 detail of incorporators
 number of directors and alternate directors
 share capital (maximum issued)
 content of MOI
FORMATION OF COMPANIES:
The company’s charter
 Alterable and Unalterable provisions:
 The new Companies Act has introduced two new concepts, alterable provisions
and unalterable provisions contained in the MOI.
 Alterable provisions:
 Are those provisions in the MOI which the company can change or regulate
itself
 Companies will be able to add provisions which are specifically suitable to
their own circumstances, rather than being forced to follow a prescribed set
of rules.
For example: a decision or agreement made by shareholders, called a specific
resolution, will need the support of 75 % of the voting rights but a company may lower
the percentage required to approve a special resolution in its MOI.
 The alterable provisions therefore relate to the allocation of power
between shareholders and directors, the procedure relating to arranging
shareholders and directors meetings, the quorums (minimum number of
voting members) required for the meetings and the majority vote
requirements to pass ordinary and special resolutions at the meetings.
FORMATION OF COMPANIES:
The company’s charter
 Alterable and Unalterable provisions:
 Unalterable provisions:
 Are provisions laid down by the Act which are compulsory.
 A company cannot choose to change or exclude any of these unalterable
provisions in their MOI or in the company rules.
 Unalterable provisions will thus exist, even if a company’s constitution
states otherwise.
 The following provisions are unalterable:
 May not limit a director’s liability.
 Indemnification and directors’ insurance.
 May not negate, limit or restrict the legal consequences from wilful
misconduct or wilful breach of trust on the part of a director.
 May not limit protection for whistle-blowers.
FORMATION OF COMPANIES:
The company’s charter
 Amendments to the MOI:
The MOI may be amended by:
 a court order
 Special Resolution adopted at a shareholders meeting if proposed by
 the board; or
 shareholders holding 10 % of the voting rights.
FORMATION OF COMPANIES:
The company’s charter
 Special conditions – Ring-Fenced companies:
 Some companies may be established under special conditions.
 This is a new type of company introduced by the new Companies Act.
 These companies are called Ring-fenced companies (RF) and such a
company’s MOI contains ‘special conditions’ or does not allow changes
of any particular provision in the MOI.
 If such a special condition is contained in the MOI, it must also be
identified in the company’s Notice of Incorporation.
 The company’s name must end with the letters RF. The name will then,
for example, look like this: Joe’s Engineering (Pty) Ltd (RF).
 The letters RF will alert those contracting with these companies that
they only operate for specific purposes and are “ring-fenced” for just
that purpose.
FORMATION OF COMPANIES:
The company’s charter
 Special conditions – Ring-Fenced companies:
 According to the new Companies Act, any outsider or third party
contracting or dealing with a company will no longer have to be
familiar with the company’s public documents.
 However, a Ring-fenced company is an exception to this rule of
the Companies Act.
 When the Notice of Incorporation draws attention to existence
of a special condition, a third party is supposed to have the
knowledge thereof.
 The effect on a third party contracting or dealing with a
company will then not be able to rely on the fact that he/she
was not aware of such special conditions and shall then be
bound by such contract.
FORMATION OF COMPANIES:
Name of the company
 Notice of Incorporation:
 Notice of Incorporation is the application form to the Companies and
Intellectual Property Commission (CIPC) to register your company.
 The name of your business must be submitted for approval.
 Notice of Incorporation must be submitted together with the MOI and
contains the following information:
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type of company
incorporation date
financial year end
registered address (main office)
company name – whether company name will be the registration number;
the reserved name and reservation number; list of four names to be
checked by the commission.
FORMATION OF COMPANIES:
Name of the company
 Requirements for the name of the company:
 The following is a list of requirements for the name of the
company:
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A non-profit company should include the letters “NPC” in its name.
A private company must include the letters “(Pty) Ltd” in its name.
A public company must use the letters “Ltd” in its name.
Name must be displayed outside the head office.
Name may not be blasphemous.
Name may not suggest the company has government support or
approval.
 Name may not be similar to that of another company.
FORMATION OF COMPANIES:
Name of the company
 Incorporation and commencement of the company:
 The MOI must be submitted to the CIPC.
 The CIPC gives a unique registration number to the company
and issues a registration certificate
 A private company can start business when the certificate of
incorporation has been received.
 A public company has to wait until a certificate of
commencement of business has been received before
commencing business.
FORMATION OF COMPANIES:
Name of the company
 Incorporation and commencement of the company:
 The certificate of commencement of business is issued when the
following requirements are met:
 when a booklet is issued to invite the public to subscribe for
shares
 when shares (payable in cash) have been allocated to the
amount of minimum subscription
 when every director of the company has paid the full amount
of the shares (payable in cash)
 when applicants do not have to pay money for shares that
have been offered for subscription
 when a statutory declaration by the chief executive or one of
the directors is made to say that the above-mentioned
conditions have been met.
FORMATION OF COMPANIES:
Prospectus – public company only
A prospectus is a document that includes important
information about a company offering to sell securities.
Under the new Companies Act 71 of 2008 the prospectus
must include all information that a potential investor may
need to assess the financial position and prospects of the
company, the securities being offered and the rights
attached to them.
The new Companies Act 71 of 2008 regulates public
offerings of securities.
The Act differentiates between initial public offerings (IPO),
primary offerings and secondary offerings:
FORMATION OF COMPANIES:
Prospectus – public company only
INITIAL PUBLIC OFFERINGS:
 The Act defines this as an offer of securities to the public if no securities of that company
have previously been offered to the public.
 A registered prospectus is needed when an initial public offering is made.
PRIMARY OFFERINGS:
 A primary offering is an offer to the public made by or on behalf of a company of
securities to be issued by that company or its subsidiary.
 A primary offering of listed shares (other than IPO) must comply with the requirements of
the JSE.
 A primary offering of unlisted shares needs a prospectus.
SECONDARY OFFERINGS
 A secondary offering is an offer for sale to the public of any securities of a company (or
its subsidiary) made by any person other than the company itself (or its subsidiary).
 With a secondary offering, a registered prospectus of the primary offering of those
shares or a written statement with information set out in the Act (a mini prospectus) is
needed.