Business Ownership and Legal Forms
This domain tests how owners choose a legal form and the consequences: liability, capital, control, continuity and formation. Expect comparisons between sole traders, partnerships, companies and cooperatives.
Main forms
- Sole trader: one owner; easy and cheap to start; unlimited liability; no separate legal personality; capital limited; the business ends with the owner.
- Partnership: generally 2–20 partners under a partnership agreement or deed; shared capital, profit and control; unlimited liability unless a limited liability partnership; the deed should cover profit-sharing, drawings, admission and dissolution.
- Private limited company: registered under the Companies Act No. 7 of 2007; separate legal personality; limited liability; shares not offered to the public; generally up to 50 shareholders; must file annual returns.
- Public limited company: can invite the public to buy shares; stricter disclosure and governance.
- Cooperative: owned and controlled by members, one member one vote; surplus distributed according to transactions.
Choosing a form
Consider capital needed, liability, control, privacy, continuity, formation cost and taxation.
Worked example
Two friends need Rs. 5 million, want limited liability but do not want to offer shares to the public. A private limited company fits: it has separate legal personality, limited liability and can raise capital from a small group, while avoiding public issue requirements. A partnership would be cheaper but exposes their personal assets.
Traps
Saying companies have unlimited liability; assuming partnerships always share profits equally; ignoring the partnership deed; confusing a public company with a government corporation.