Three Friends and a Bakery
Three friends, Tumelo, Anele and Kefilwe, want to open a bakery in Molepolole. They have saved P45,000 between them and can borrow P30,000 from a bank. Tumelo will bake, Anele will manage sales, and Kefilwe will keep accounts. They cannot agree on the business form. Tumelo wants a partnership because it is cheap and easy to start. Anele wants a private company because a bigger supermarket chain has offered a supply contract, but the chain requires the supplier to be a registered company with limited liability. Kefilwe is worried about losing her personal savings if the bakery fails. The friends also disagree about what happens if one of them wants to leave. A fourth friend offers to invest P20,000 but wants no say in daily decisions.
1. Compare the partnership and the private company as suitable forms for the bakery. Use the facts about the supermarket contract, liability and the fourth investor.
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Partnership
- Easy and cheap to form.
- Partners share capital, profits and losses.
- Unlimited liability: Kefilwe's personal savings are at risk.
- Decision-making can deadlock, and the partnership may end when a partner leaves.
- A partnership may not satisfy the supermarket's requirement for a registered company.
Private company
- Separate legal personality and limited liability, which protects the owners' personal assets.
- Can enter contracts in its own name and can issue shares to the fourth friend.
- Continuity continues despite changes in members.
- Registration and annual returns cost money, and accounts may need auditing.
- Decisions are governed by the Companies Act and the company constitution.
The supermarket contract and Kefilwe's liability concern point strongly to a company. The partnership's simplicity does not outweigh unlimited liability when a large supply contract is at stake. The fourth friend can become a shareholder with no management role if the constitution separates ownership from control.
2. Recommend a business form and explain the safeguards the friends should put in place.
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Recommendation: register a private company limited by shares. Reasons: the supermarket requires a company; limited liability protects Kefilwe's savings; the fourth investor can buy shares; and the business gains continuity.
Safeguards
- A shareholders' agreement covering profit distribution, roles, salaries, decision thresholds, exit and dispute resolution.
- Issue the fourth friend non-voting shares or a loan rather than management rights, because she wants no say in daily decisions.
- Keep personal and company bank accounts separate.
- Maintain proper records and hold annual meetings.
- Agree what happens if a shareholder dies or wants to sell, including pre-emptive rights for the other shareholders.
- Take professional advice on registration and tax.
A company is not automatically safer. Limited liability can be lost through personal guarantees or reckless trading. The friends must avoid signing personal sureties for the bank loan unless they fully accept that risk. The form must match the contract and the liability concern, not just the cheapest option.
3. Explain two clauses in the ownership agreement that would prevent future conflict.
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Clause 1: Exit and buyout clause. This states how a shareholder's shares are valued and who can buy them if a friend leaves, retires or dies. Without it, the remaining owners may be forced to work with a stranger or go to court. A fair price formula, such as an independent valuer or a multiple of profits, reduces arguments.
Clause 2: Decision-making and deadlock clause. This allocates decisions: day-to-day management to Anele, baking to Tumelo, accounts to Kefilwe. Major decisions such as new loans or selling the business require a special majority. It also sets a tie-breaker such as mediation. This matters because three equal owners can block each other.
Other useful clauses include non-compete, confidentiality, profit-sharing and capital calls. The reasoning is simple: friendship is not a governance system. Written rules reduce the chance that a disagreement destroys the business and the relationships.