This form of the legal entity entered by Edward is sole proprietor meaning it is a business entered by an individual to conduct business or company. A sole proprietorship is a business that is owned by one person. The vast majority of small businesses starts as a sole proprietorship. These firms are therefore by a person who is responsible for running day-to-day activities of the business.
There is no separate cost to establish a sole proprietorship. A sole proprietorship is established when the owner begins operating his business.
There are no separate licenses that must be obtained to form a sole proprietorship. The sole proprietorship will be maintained so long as the owner keeps doing the business.
The advantages of a sole proprietor are that it is easy and simple to start, no operating expenses are required like the other entities, it only consists of one owner and the owner maintains 100% control and ownership of the business as Edward wants “to open his own personal fitness and lifestyle centre”.
Other advantages of a sole proprietor are secrecy, unique tax advantages meaning income earned us the owner’s income which is not taxed but the business’s income and expenses are taxed.)
Sole proprietor also has disadvantages such as limited capital as Edward “needs few investors to inject some capital into the business”; difficulty in obtaining credit, for example, Ed is probably going to need a few investors to inject some capital to business; Unlimited liability for the firms debts meaning Edward is personally liable for all debts and actions of his company; Limited life because business and the owner are legally the same and also Lack of financial controls meaning that Edward will not require financial statements and will not have to maintain company minutes as a corporation.
The lack of accounting controls can result in Edward being lax about financial matters, perhaps falling behind in payments or not getting paid on time. It can be a serious issue if financial controls are not strictly managed.
Another disadvantage of a sole proprietor is that risks that are taken by the sole proprietor may result in personal bankruptcy, and also the death or prolonged illness of the sole proprietor will lead to the end of the business
The owners’ equity of sole proprietor is calculated in this way. A sole proprietor’s total business assets minus his total business liabilities equal her owner’s equity in the business. The assets include, but are not limited to, start-up capital, available cash, property, products, and equipment. The liabilities include operating expenses, taxes, insurance costs and all costs of doing business. Knowing an owner’s equity lets you determine the financial health of the sole proprietorship.
Total Assets – Total liabilities = Owner’s equity (for a sole proprietor).
Overall, Edward will start a sole proprietor as he wants to open his fitness and lifestyle centre and is probably going to need a few investors to inject some capital into the business and also does not want to spend unnecessary fees on registration and legal documents.
One of the limitations of a sole proprietor is that the sole proprietor may not be able to raise additional capital from outside sources to expand the business. This means that the sole proprietor is not designed to have investors. It is not considered to be separated from its founder.
As it is stated in this case study that Edward is probably going to need few investors to inject capital into the business. Below are how Edward can use to get capital for his company:
Edward can make an additional contribution to his funds, increasing the owner’s equity stake, or the amount he has invested, in the business. Edward can look for debt financing or money he can borrow and pay it back, such as a bank loan.
He can raise capital by taking out loans to support his business. However, a sole proprietorship is not an independent business entity, it is a business activity operated under the name and personal responsibility of the owner. This means any business loan will be processed under his name and affects his personal credit history. The loan decision will be made based on his creditworthiness, not the creditworthiness of a business, and he may be required to pledge personal assets as a guarantee.
Edward can also rely on gifts and loans from family and friends to capitalize on his business. Although he cannot formally offer a share of the business in exchange for these funds, he can pay the money back under favourable terms or offer other informal benefits in exchange.
There are some other ways in which Edward can use to inject capital, but these ways can change the status of the company to partnership, because in sole proprietor, the owner may not be in able to generate capital from outside parties such as investors by the time he involves investors in his company the entity will change from sole proprietor to partnership.
This means selling equity in a company. When selling equity in a company it will make the buyer a part-owner, so according to law sole proprietor does not allow multiple owners so sole proprietorship is unable to raise equity capital. A sole proprietorship can have only one owner. Unlike other entities that can sell shares of stock to an unlimited number of investors to raise equity capital, there is no mechanism for a sole proprietor to divide the ownership interest in the company and keep the business structure intact. If Edwards decides to bring on a partner in exchange for an investment of capital, his business will become a partnership.
According to CITATION Kom06 l 7177 (Komaromi, 2006) When a small enterprise organized as a sole owner hires individuals to invest in it, it becomes a common partnership by default. The upshot is that shareholders are deemed general partners who, whether or not they are participating in the management of the company, are personally responsible for company debts and liabilities. Investors likely want to safeguard themselves against such private liability for their corporate debts, particularly when they are not active in running the company. Therefore, if organized as a sole owner, a sole proprietorship is less probable to get equity finance. A general partnership is an association of two or more persons to carry on a business for profit but excluding an association formed under a non-partnership state statute CITATION Kom06 l 7177 (Komaromi, 2006).
A partnership company separate from its partners. The partners increase equity resources by adding a new partner or restructuring the current partners ‘ relative ownership interest to reflect new contributions. One of the disadvantages of the general partnership is that a general partner can be held liable for all of the partnership’s debts and obligations.
According to CITATION SSu18 l 7177 (S, July 26, 2018), Partnership is the form of business organization where two or more individuals come together and agree to share profit and losses of the business, which is carried on by them. The individuals who run the business are called partners.
The difference between sole proprietors and partnerships is presented in the form of the chart below.
Meaning A type of business organization, in which only one person is the owner as well as the operator of the business, is known as Sole Proprietorship. A business form in which two or more persons agree to carry on business and share profits & losses mutually is known as Partnership.
Governing Act No specific statute Indian Partnership Act, 1932
Owner Known as a sole trader or sole proprietor. Individually known as partners and collectively known as a firm.
According to Alexander Forbes 2019 financial statements, from 2018 to 2019 their revenue has increased from 3 981 000 000 to 4 058 000 000. This indicates that the company is doing well. With a revenue increase of 77 000 000, the company will not suffer at a loss.
The net profit has also increased from 327 000 000 to 388 000 000.
Group Statement of financial position of 2019 shows that Total equity plus liabilities are equal to the Total Assets of the company, which means with what the company owns(Assets) it can pay what it owes(Liabilities). Left with what they own (Owners’ Equity). This shows that they will be able to meet their financial obligation.
The directors of Alexander Forbes Preference Share Investments Limited are committed to the highest standards of corporate governance as embodied in the King II Report on Corporate governance 2002. It is noted that the company is an investment holding company and not an operating company.
In keeping with its governance responsibilities, the board has established mechanisms and policies appropriate to the group’s business to ensure compliance with king II and the JSE listing requirements. Alexander Forbes is also listed on the Botswana and Namibia stock Exchanges and the governance standards applicable in these jurisdictions.
The board supports the principles of transparency, ethical behaviour, and honesty, in all the groups’ dealings. The directors regularly review the group’s policies and procedures to ensure that they remain relevant and appropriate.
As the date of publication of this report, the board of Alexander Forbes Prefco comprised two independent directors. Mr Doige chairs of the board. No executive directors were appointed to the board. The board is considered to be effective in size and composition. The board meets quarterly or more frequently if circumstances require. Directors of Alexander Forbes are required to comply with the prescriptions of the JSE Limited regarding inside information transactions and disclosure of transactions. The directors have access to training and advice by the company secretary and are entitled to seek independent professional advice concerning the affairs of the company at the company’s expense. The board is briefed on external changes relevant to the business as and when required.
The board has an Audit Committees comprising the two independent board members. Mr Gaskell chairs the Audit Committee. Audit Committee Terms of reference have been published. The auditors do not provide the company with any non-audit services. Due to the nature of the board and the purpose of the company, remuneration, nominations and other committees are not deemed to be necessary.
The Audit Committee meets at least four times per year. These meetings are attended by the external auditors and management of Alexander Forbes Equity Holdings (PTY) Limited (EquityCo) as appropriate as well as EquityCo’s group finance director.
The company secretary is qualified to perform her duties by following applicable legislation and is considered by the board to be fit and proper for the position. The directors have the access to the advice and services of the company secretary who ensures compliance with applicable procedures and legislation, and the removal of the company secretary is a matter for the board as a whole. (Salvado)
If one wishes to open a business they should initially consider first having enough capital and if not they have the opportunity to seek for partners to join meaning they could form a partnership or seek for investors to create a company. This is in aid of avoiding bad company business decisions. An increase in business revenue indicates growth within the business. Once all partners in a business can make a company decision that grows the company, the company is therefore in the advantage of having a rapidly increasing financial record.
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