Summary of Forms of Business Ownership

## Introduction Business ownership determines who controls a business, who pays its taxes, who takes responsibility for its debts, and how decisions are made. This guide focuses on key characteristics that affect owners and small businesses so you can understand practical consequences when choosing or analysing an ownership structure. > **Definition:** A sole trader is a business owned and run by one person who supplies the capital, makes the decisions, and is personally liable for the business. ## 1. Sole trader — core characteristics ### What is a sole trader? - A sole trader (also called sole proprietor) is a business owned by one person. The owner uses personal funds or personal loans to start and run the business. - Often chosen by individuals with a specific skill or trade (for example, a baker, tailor, or freelance graphic designer). > **Definition:** Unlimited liability means the owner is personally responsible for all business debts and may lose personal assets if the business cannot pay its creditors. ### Legal status and contracts - A sole trader is not a separate legal entity: the owner and the business are the same legal person. - The owner signs contracts and incurs obligations in their personal capacity. ### Liability and risk - The owner has unlimited liability and therefore personal assets can be used to settle business debts if business assets are insufficient. - This makes sole proprietorships higher risk for the owner compared with registered entities that offer limited liability. ### Continuity - A sole trader business lacks continuity: the business often ends if the owner dies, retires, or permanently stops operating. - Succession may occur informally (e.g., a child trained by a parent takes over) but legal continuity requires registration or transfer to a new legal owner. ### Management and control - The owner controls day-to-day operations and strategic decisions. - The owner may hire managers but remains legally responsible. ### Capital - Capital comes from the owner’s personal funds or personal borrowing. - Limited sources of capital can restrict growth; owners who need more capital may consider forms of ownership with multiple contributors. ## 2. Key concepts that apply across ownership types (focus on owner effects) ### Liability (who bears debt) - Liability describes who is responsible for business debts: the owner or the business as a legal entity. - Important note: it is always the OWNER (or owners) who have limited or unlimited liability — not the business itself. > **Definition:** Limited liability means an owner is protected from losing personal assets beyond the amount they invested in the business. ### Tax implications - Taxes on business profit are paid by the owner(s). For individuals in South Africa a progressive tax scale applies: the higher the income, the higher the tax rate (maximum 45% in 2020 for individuals). - Registered companies pay a corporate tax rate (28% in 2020) and dividends may be taxed further (20% dividend tax in 2020). ### Continuity and registration - Businesses that are legally separate from their owners (registered entities) have continuity: death or retirement of owners does not automatically end the business. - Unregistered businesses (like sole traders) usually do not have this automatic continuity. ### Management and control differences - In unincorporated businesses the owner directly manages the business or appoints managers. - In companies owners (shareholders) typically elect a Board of Directors to manage the company; ownership and management are separate. Each share normally grants one vote to elect directors. ### Capital needs - Larger businesses need more capital; owners must choose a structure that allows sufficient capital raising (more owners, external investors, or registered entity rules may help). ### Formation procedures - Different ownership structures require different formation steps: registration, documentation, tax registration