Concepts unique to companies
Until now in Accounting we have been looking at 2 types of businesses:
- Sole trader - ONE OWNER
- Partnership - 2 or MORE PARTNERS
Because of limitations in these, companies were originated. What are the differences between these types of businesses
SOLE TRADER
• One owner
• Not a separate legal entity
• No legal regulations except pay tax and have a trading licence
• Profits belong to the owner
• Owner has unlimited liability
• No founding documents
PARTNERSHIP
• or more partners
• Not a separate legal entity
• No legal regulations except pay tax and have a trading licence
• Profits are distributed according to specific ratios as stated by the partnership agreement
• Partners have unlimited liability
• Established through a partnership agreement
IN GRADE 12 YOU WILL BE INTRODUCED TO COMPANIES
Company
• Owned by shareholders
• Separate legal entity
• Operates under the Companies Act No. 71 of 2008
• Profits belong to the company and are paid to shareholders by way of dividends
• Shareholder's liability is limited
• managed by Board of directors
• founding documents
- Memorandum of Incorporation and Notice of Incorporation
Definitions
• Legal entity means to be able to enter into contracts, assume
obligations, incur and pay debts, sue and be sued, and to be held responsible for actions
A company as a legal entity is able to do the following:
• Operate independently from its shareholders
• Own assets eg- vehicles, building, machines, etc.
• The income it generates belongs to the company and therefore it is liable to pay tax like all “people”
• Company is liable for its own debts.
The directors of the company merely serve as the ‘ears, eyes, arms, legs and brain’ of a company. They act on behalf of the Company.
Implications for the company being a legal entity:
• Memorandum of Incorporation ⇒ document used to form company. It sets out the basic rules for how the company is to be operated.
• Shares and shareholders ⇒ Shareholders are the owners who provide capital. There can be many owners. Capital is divided into 'Shares' Each share holder / part-owner provides capital by buying a certain number of shares. Price per share paid = ISSUE PRICE. It may change over life of company.
• Directors ⇒ operate the company. Appointed by shareholders at AGM. They earn directors' fees.
• Continuity ⇒ Company has its own rights and duties and exists for a long time apart from its shareholders.
ST/PP - Continuity ends when an owner withdraws from business / dies.
However, for a company, it will continue to exist even after a shareholder has withdrawn from it.
• Assets of a company ⇒ company owns assets under its own name. Assets do not belong to shareholders unless distributed as dividends. If company is liquidated, then shareholders will share in the division of the assets.
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• Liability for debts of a company ⇒ Company liable for its own debts, not Shareholders.
• Independent auditors ⇒ Because of separation of ownership and control, shareholders need to be assured that financial statements prepared by directors contain reliable information. Independent auditors are hired by shareholders to conduct tests and cheeks of the books so that they Can express an opinion on the reliability of the financial statements. They are paid audit fees by the company.
• sharing of profits ⇒ profits or losses belong to the company not shareholders. Shareholders entitled to profits when dividends are distributed or company buys back shares.
• Income tax ⇒ Company pays tax its own right. Tax paid to SARS half way through financial year and again at end of financial year = Provisional tax. Once financial statements are finalised, a final payment is made to SARS or a refund is received from SARS.
• Registration of company ⇒ Companies are registered with Companies and Intellectual Properties Commission.
• Company name - name must be unique and only be used by one company. Name ends in LIMITED or LTD.
Concept of limited liability:
• Shareholders not liable for company's debts.
• Shareholders will only lose the value of their investment in the company if company becomes insolvent.
Types of companies allowed by companies Act:
For-profit companies
↳ public company = shares offered to general public, e.g. ABSA bank Ltd.
↳ private company= shares not sold to public, restrictions apply to transferring of shares eg. Pick in Pay.
↳ state-owned company = owned by municipality or registered as a public company under the Public Finance Management Act, eg Telkom, Eskom
↳ personal liability company= limited liability does not apply to owners. Owners are held responsible for the professional decisions taken, e.g law firm, doctors.
Formation of a company
When registering and founding a
company, the Companies Act stipulates the following;
• A MOI and NOI must be drawn up and submitted to CIPC
• Registrar will then
- approve company name
- enter prescribed in formation concerning Company in the Companies Register
- endorse NOI and MOI
• A registration certificate will then be issued to the company so that it may commence business.
• A prospectus has to be compiled. It should contain the name and address of the company, details of the directors, particulars of share capital etc.
* prospectus= invites public to purchase shares and sets out information necessary for public to make their decisions. It will stipulate the price to be paid for each share, and restrictions on volume of shares which may be purchased, and share application forms will be provided. The first issue of shares to the public is known as the Initial Public Offering or IPO.