Chapter 7

Part 2
Chapter 7
BUSE 2022/3
© Oxford University Press Southern Africa, 2008. All rights reserved.

Learning outcomes
 The sole proprietorship
 The partnership
• The partnership agreement
• Rights and duties of partners
• Dissolution of the partnership
• Advantages and disadvantages of the partnership

Learning outcomes
 The company
• Types of companies
• Incorporation of companies
• Close corporations
• Small business and the act
• Company names
• Directors duties and liabilities
• Business rescue
• Regulatory agencies
• Winding-up and liquidation

• Advantages and disadvantages of the company

The sole proprietorship
 The sole proprietorship is a business which is owned and managed by
a single individual;
 Considered to be the easiest way to start a venture;
 This form is useful because:
• It requires very few, if any, formal requirements to commence

operations with greater flexibility;
• It vests decision-making and control in one individual;
• All profits comes to the owner

The sole proprietorship
 The drawbacks with opting for a sole proprietorship are:
• Sole proprietorship are personally liable for all the debts incurred by
the business. Unlimited liability has the risks of having their estates
sequestrated and assets attached, in order to recover monies owed
to creditors;
• Sole contributors of capital, which limits growth potential;
• Lacks credibility in raising long-term finance (because they are

‘one-person’ operations;
• No separate legal identity means a lack of perpetual succession;

and,
• Because there is only one individual running the operation, there

are limited skills and knowledge
The partnership
 A partnership is a formal association between at least two but no more
than twenty (20) individuals who came together to conduct business;
 The partnership agreement
• The basis is the partnership agreement;
• The partnership agreement consists of several elements which

distinguish it from other agreements, and in essence, define a
partnership:

The partnership
 The partnership agreement
• Contributions
• Profit as objective
• Business carried on jointly and for joint benefit
• Liability
• Sharing of profits and loses
• Representation
• Ownership of assets

The partnership
 Rights and duties of the partners
• Good faith
• Participation in management
• Reasonable Care
• Ownership and use of partnership property
• Sharing profits and losses
• Remuneration.

The partnership
 Dissolution of the partnership
• Implications for the dissolution of the partnership:
 The partnership agreement terminates;
 Partners can no longer act on behalf of or bind co-partners after

dissolution, unless they are completing a transaction, which
was initiated while the partnership was still in existence;

The partnership
 Advantages and disadvantages of the partnership
• As a form of venture, the partnership can accommodate up to

twenty (20) members;
• There is greater access to capital, knowledge and skill;
• Disadvantages include:
 Unlimited liability: because it is not a distinct and separate
legal entity, partners are jointly and severally liable;
 The principle of mutual mandate: each partner has the power
to represent and bind the partnership in all transactions;
 Dissolution of the partnership based on personal
circumstances: the partnership is dissolved when any of the
individuals die, retire, or is extradited as well as when a new
member is allowed to join
The Company
 The formation and regulation of a company is governed by the
Companies Act 71 of 2008 (as amended by the Companies
Amendment Act 3 of 2011);
 The Act, which came into effect on 1 May 2011, seeks in part, as per
subsection 7(b)(i), to promote the development of the South African
economy by encouraging entrepreneurship and enterprise efficiency;
 Two categories of companies, namely non – and profit companies, are

considered under the act

The Company
 Types of Companies
• Non-profit companies, which replace section 21 companies and

companies limited by guarantee, are of consequence to social
entrepreneurs;
• They are companies as defined by the Act as companies that are

incorporated for a public benefit or other object relating to one or
more cultural or social activities, or communal group interests (as
per item 1(1) of Schedule 1);
• Memorandum of Incorporation (MOI)

The Company
 Profit companies
• Categorised as:
 State-owned companies (SOEs);
 Personal liability companies;
 Private companies; and,
 Public companies

The Company
• State-owned companies:
 These companies are a new category under this act. They are
listed as either:
o Major public entities, national or provisional public entities,

as well as national or provisional government business
enterprises in Schedule 2 or 3 of the Public Finance
Management Act 1 of 1999 or;
o Owned by a municipality, as contemplated by Local

Government: Municipal Systems Act 32 of 2000, and are
otherwise similar to enterprises referred to above.
The Company
• Private companies:
 Companies are considered private in terms of subsection 8(2)

(b) if its not a ‘SOC’, and its MOI prohibits it from offering any
of its securities to the public while also restricting the
transferability of its securities;
 There is no limit to the number of shareholders a private

company can have;
 Private companies are required to have at least 1 director

(subsection 66(2)(a))
 ‘Proprietary Limited’ or ‘(Pty) Ltd’ must appear after the name
The Company
• Public companies:
 A private company by default because it is not a ‘SOC’, ‘Pty
(Ltd)’ or a ‘INC’;
 Their MOI allows shares to be offered to the public ;
 According to section 39, shareholders of a public company
have no pre-emptive rights (i.e. existing shareholders have
rights to shares before non-shareholders in order to ensure
their ownership is not diluted), unless the MOI stipulates
otherwise
 Public companies are required to have at least 3 directors
(subsection 66(2)(b))
 As per subsection 11(3)(c)(iii) ‘Limited’ or ‘Ltd’ should appear
after the name
The Company
 Small businesses and the Act
• The new act seeks to balance the needs of the small business by
providing greater flexibility, through:
 It is necessary for all companies to prepare financial

statements in line with financial reporting standards, it is not
necessarily a requirement for all companies to be audited –
subsection 7(2)(a) makes it compulsory for public companies
to be audited, however, 7(2)(b) requires all other companies
only be audited, if so required by the regulations made by the
Minister of Finance in terms of subsection 7:-
o Public interest;
o Economic or social significance

The Company
o Its annual turnover;
o The size of its workforce; or,
o The nature and extent of its activities
 Companies other than public companies may subject

themselves to to either a voluntary audit, or be
independently reviewed;
 SMMEs who internally compile their own financial

statements, and who have a public interest score of less
than 100 are able to determine their own financial reporting
standard
The Company
 The MO can be potentially simpler than that of a large

company since small businesses would not typically want to
change the alterable provisions of the Act;
 The Act provides for substantial interchangeability of director

and shareholder powers, which results in a control structure
that emulates that of a CC;

The Company
 Company names
• A company name is a critical part of its identity;
• According to section 11 of the Act, a company’s name may

comprise one or more words in any language, irrespective if the
word or words are commonly used or contrived for the purpose;
• In the case of a for-profit company, the name may be the

registration number of the company together with the relevant
indicator of the type of company;

The Company
 Directors’ duties and liabilities
• Section 75 stipulates that a director must not use his or her

position, or any information obtained while acting as a director to
gain an advantage for him or herself, or for another person other
than the company or a wholly-owned subsidiary of the company;
• Information should not be used to knowingly cause harm to the

company or a subsidiary of the company;
• Directors must communicate to the board at the earliest

practicable opportunity any information that comes to his or her
attention, unless he or she
• Act in good faith

The Company
 Business rescue
• The so-called business rescue regime replaced the notion of

judicial management under the 1973 Act;
• Subsection 128(1)(b), proceedings to facilitate the rehabilitation

of a company that is financially distressed by providing for:
 The temporary supervision of the company, and of the

management of its affairs, business and property;
 A temporary moratorium on the rights of claimants against

the company or in respect of property in its possession; and,
 The development and implementation, if approved, of a plan

to rescue the company through restructuring in such a way
that a company is more likely to continue on a solvent basis.
The Company
 Regulatory agencies
 Companies and Intellectual Property Commission (CIPC)
• In terms of section 186 of the Act:
 The efficient and effective registration of companies and

external companies and other juristic persons as well as
Intellectual Property rights;
 The maintenance of accurate, up-to-date and relevant

companies information;
 The promotion of education and awareness of CIPC laws;
 the promotion of compliance with the Act;
 The efficient and effective enforcement of the Act

The Company
 The Companies Tribunal
• In terms of section 193 and 195 of the Act:
 Adjudicate in relation to any application;
 Assist in the resolution voluntary disputes in terms Part C of

Chapter 7;
 Perform any other function assigned in the Act

The Company
 The Takeover Regulation Panel
 The regulation of affected transactions and offer to the extent

providers for;
 The investigation of complaints with respect to affected

transactions;
 The application for a court order to wind up a company;
 Consultations with the Minister in respect of additions,

deletions or amendments to the Takeover Regulations

The Company
 The Financial Reporting Standards Council
 Receive and consider any relevant information relating to the

reliability of, and compliance with, financial reporting
standards;
 Advise the Minister on matters relating to financial reporting

standards;
 Consult with the Minister on the making of regulations

establishing FRS.

The Company
 Winding-up and liquidation
• Two types of liquidation:
 Voluntary Winding-up: either the members or the creditors;
 Compulsory Winding-up: by the court. The court issues a

winding-up order to the Master of the Supreme Court, who
appoints a liquidator who winds up the company and pays
any outstanding debts before distributing surpluses to
shareholders.

The Company
 Advantages and disadvantages of the company
• Advantage:
 A separate legal entity: a company can acquire its own

rights and incur its own obligations;
 Limited liability: directors aren’t held jointly and severally

liable for liabilities incurred by the company;
 Perpetual succession: the company, because of its own

legal identity, continues with business regardless of the
composition of its membership.

The Company
 Advantages and disadvantages of the company
• Disadvantage:
 The degree of regulation complexity: the formation of the

company is governed by the provisions of the Companies
Act, and is more complex and inflexible;
 Bound by actions of directors: directors who act beyond

the scope of their powers and without the authority of the
company make the company liable for any liabilities incurred;
 Access to capital: access to shareholder capital is strictly

controlled by the Act.

The Franchise
 The franchise, as a business form, has attracted interest in SA because
of the fact that it presents a less risky alternative to establishing a new
venture, with associated support and training;
 Franchising is considered to have a positive impact on economy growth

through employment creation, while at the same time attracting much
needed foreign direct investment;

The Franchise
 Modern features of franchising requires clarification such as:
• Important to distinguish between franchisor, franchisee and

franchise. The franchisor is the parent business or parent company
which grants the right of use to its name and brand, the franchisee
purchases the right to use the parent company’s name, brand etc.,
while the franchise refers to the right itself;
• Franchisees supplemented their own money which they use to self

finance the franchise with loans from banks as well as, potential,
the franchisor;
• Independently owner-managed firms are one form of franchise.

Multi-unit franchises or corporate franchisees are fairly common
place, and might outstrip the franchisor as measured by the value
of corporate assets;
The Franchise
 Types of franchises
• Product or trade name franchising:
Franchisees are authorised to distribute a product under a franchisor’s

trademark. Common examples includes car dealerships, petrol
stations, or soft drink distributors;
• Business format franchising:
Franchisees are licensed to replicate the franchisor’s business

concept, including operating methods, marketing strategy, trademark,
quality control, and operating standards. This is the more common
form of franchising and includes fast-food chains, as well as service
providers

The Franchise
 Advantages of franchising
• Market expansion
• Monitoring
• Economies of scales
• Risk management

The Franchise
 Disadvantages of franchising for franchisor
• Maintaining a working relationship with the franchisee
• Quality control
• Threat of competition

The Franchise
 Advantages of franchising for the franchisee
• Access to training and support
• Access to capital
• Leverage

The Franchise
 Disadvantages of franchising for the franchisee
• Limited control and flexibility
• Costs
• Reliability of the Franchisor
• Erosion of name and reputation

The Franchise
 Is Franchising entrepreneurial?
• Franchising is considered to be the very ‘antithesis’ of

entrepreneurship by virtue of the fact that it displays:
 Limited risk-taking; and,
 Creativity

The co-operative
 The notion of the co-operative dates back to when less powerful
members of society realised the power and benefits of acting
collectively to promote their interests, as compared to acting
individually;
 Since the Rochdale Pioneers, co-operatives as a business form have

come to represent, on a global scale, an important tool in poverty
alleviation and community development;
 Co-operative businesses represent:
• 1 Billion people;
• $ 1,1 Trillion Dollars;
• Securing livelihoods for 3 Billion People; and,
• 100 Million jobs worldwide.

The co-operative
 Defining co-operatives
• Cooperatives are defined in the Cooperatives Act 14 of 2005 as:
‘…autonomous associations of persons united voluntarily to meet their

common economic, social, and cultural needs and aspirations through
a jointly-owned and democratically-controlled enterprise’.
• Their values and principles largely distinguish them from other

forms venture forms, values such as:
 Self-help;
 Self-responsibility;
 Democracy;
 Equality;
 Equity; and,
 Solidarity
The co-operative
 Defining co-operatives
• Co-operative members are held to believe in the ethical values of:

 Honesty;
 Openness;
 Social responsibility; and,
 Caring for others
• .

The co-operative
 Co-operatives principles:
 Voluntary and open membership
 Democratic Member Control
 Member Economic Participation
 Autonomy and Independence
 Education, training and information
 Concern for the community

The co-operative
 Types of co-operatives
• The three forms of co-operatives are:
Primary co-operatives – defined as per the formal definition;
Secondary co-operatives – refers to co-operatives formed by two or

more primary co-operatives to provide sectoral services to its
members (such as marketers and bookkeepers). The secondary co-
operative may include juristic persons; and,
Tertiary co-operatives – refers to those co-operatives whose

members are secondary co-operatives and whose object is to
advocate and engage organs of state, the private sector and
stakeholders on behalf of its members. This form of co-operative may
also be referred to as a co-operative apex.
The co-operative
 Legal characteristics of co-
operatives
• Registration
• Liability
• Pre-incorporations
• Surpluses
contracts
• Management
• Name of co-operative
• General meetings
• Constitution
• Perpetual existence
• Capital
• Winding up
• Membership

The co-operative
 Advantages of co-operatives
• Provision of goods and services – important providers of quality

goods and services to members and communities;
• Access to quality supplies and services at reasonable cost –

members of a co-operative are in a far stronger position to negotiate
for better terms, discounts and tailored products and services as a
group;
• Increased marketing potential – joining forces allow members to

lower their distribution costs, conduct joint product promotions, and
deliver their products;
• Share in the earnings – members of a co-operative share in any

earnings generated, either in the form of cash, or in the form of
increased equity, or both.
The co-operative
 Advantages of co-operatives
• Lobbying – members of a co-operative can better lobby

government for favourable laws and regulation collectively;
• Local economic development – co-operatives play an important

role in providing jobs for communities. Because of their collective
nature, they generate social capital within communities; and,
• Socially conscious – Co-operatives ground members in

democracy, but they also provide social benefits such as education
and training for members and communities. Members are also
grounded in ethical values and principles that guide them in the
governance of co-operatives.

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Part 2

© Oxford University Press Southern Africa, 2008. All rights reserved.

• The partnership agreement

• Rights and duties of partners

• Dissolution of the partnership

• Advantages and disadvantages of the partnership

© Oxford University Press Southern Africa, 2008. All rights reserved.

• Small business and the act

• Directors duties and liabilities

• Winding-up and liquidation

© Oxford University Press Southern Africa, 2008. All rights reserved.

 Considered to be the easiest way to start a venture;

 This form is useful because:

• It requires very few, if any, formal requirements to commence

• It vests decision-making and control in one individual;

• All profits comes to the owner

© Oxford University Press Southern Africa, 2008. All rights reserved.

• Sole contributors of capital, which limits growth potential;

• Lacks credibility in raising long-term finance (because they are

• No separate legal identity means a lack of perpetual succession;

• Because there is only one individual running the operation, there

 The partnership agreement

• The basis is the partnership agreement;

• The partnership agreement consists of several elements which

© Oxford University Press Southern Africa, 2008. All rights reserved.

• Business carried on jointly and for joint benefit

• Sharing of profits and loses

© Oxford University Press Southern Africa, 2008. All rights reserved.

• Ownership and use of partnership property

• Sharing profits and losses

© Oxford University Press Southern Africa, 2008. All rights reserved.

• Implications for the dissolution of the partnership:

 The partnership agreement terminates;

 Partners can no longer act on behalf of or bind co-partners after

© Oxford University Press Southern Africa, 2008. All rights reserved.

• As a form of venture, the partnership can accommodate up to

• There is greater access to capital, knowledge and skill;

 Two categories of companies, namely non – and profit companies, are

© Oxford University Press Southern Africa, 2008. All rights reserved.

• Non-profit companies, which replace section 21 companies and

• They are companies as defined by the Act as companies that are

• Memorandum of Incorporation (MOI)

© Oxford University Press Southern Africa, 2008. All rights reserved.

 State-owned companies (SOEs);

 Personal liability companies;

 Private companies; and,

© Oxford University Press Southern Africa, 2008. All rights reserved.

o Major public entities, national or provisional public entities,

o Owned by a municipality, as contemplated by Local

 Companies are considered private in terms of subsection 8(2)

 There is no limit to the number of shareholders a private

 Private companies are required to have at least 1 director

 It is necessary for all companies to prepare financial

o Economic or social significance

o Its annual turnover;

o The size of its workforce; or,

o The nature and extent of its activities

 Companies other than public companies may subject

 SMMEs who internally compile their own financial

 The MO can be potentially simpler than that of a large

 The Act provides for substantial interchangeability of director

© Oxford University Press Southern Africa, 2008. All rights reserved.

• A company name is a critical part of its identity;

• According to section 11 of the Act, a company’s name may