Chapter 4
Establishing a business
Learning Units covered
• Business World and Business Management
• Entrepreneurship
• Business Environment
• Establish the business
Next topics
Viability of business idea
Business Plan
End of semester 1
Semester 2 BUSINESS FUNCTIONS
Learning outcomes
• Understand and discuss the key considerations that are applicable when a form of
business has to be chosen
• Distinguish between the different forms of enterprise found in South Africa
• Explain the objectives, importance and need for a business plan
• Evaluate a business plan
• Give an overview of a business plan
• Identify the location factors and the impact of these on a business.
Chapter outline
• Introduction
• The legal forms of ownership
• Developing a business plan for the new business
• The location of the business
• Summary
The legal form of ownership
• There are various forms of enterprises an entrepreneur can
choose from to conduct his/her business.
• The first fundamental issue an entrepreneur is faced with is
to choose the type of enterprise.
• Understanding the features of each enterprise and how it will
influence the entrepreneur’s circumstances is the key to
choosing the right form of ownership.
Forms of Enterprise
1) Sole proprietorship
2) Partnership
3) Business Trust
4) Close Corporation
5) Company
6) Other forms of enterprise
The legal form of ownership
• Considerations in choosing a form of enterprise:
• Legal (or juristic) personality
• Continuity or perpetual existence
• Limited liability
• Degree of control or management authority
• Potential for capital acquisition
• Compliance with legal formalities and regulations
• Taxation
• Transferability of interests.
Sole proprietorship
• A business that is owned and
managed by one individual.
The partnership
• A contractual relationship between
two or more persons who operate a
lawful business with the objective of
making a profit.
The partnership
• Contractual relationship between 2 or more persons (partners)
• How partnerships are affected in terms of the Companies Act (No.
71 of 2008)
o Previously only 20 members allowed
o Companies Act changed this number to unlimited number of members
o Greater number of partners could hold greater risk of personal liability
The close corporation
• May have one or more members
(not more than 10) that own and
control the close corporation, that
exists as a separate legal person.
The close corporation
• How CCs are affected in terms of the Companies Act (No. 71 of
2008)
o No longer possible to register new close corporations
o Companies may no longer convert to close corporations
o Certain close corporations must comply with stricter legal requirements
o Identical regulation requirements apply to close corporations and private
companies
o Close corporations must now adhere to Close Corporations Act and
Companies Act
The company
• A company is developed to obtain more
capital than they could through a sole
proprietorship or partnership, and
ownership and control is separated.
The company
• How companies are affected in terms of the Companies Act
(No. 71 of 2008)
o Simplified registration procedure
o Classification of companies will change to 2 types: profit and non-
profit companies
o Stricter requirements for public companies
o Corporate governance
o Board of Directors to have more decision making power
The company
• Profit companies
• Public companies
• Private companies
• State-owned companies
• Personal liability
• Non-profit companies
Differences between a public company and a
private company
• Difference in the number of members required and allowed
• Difference in director number requirements
• Difference in transferability of shares
• General public cannot subscribe to the shares of a private company
• (Pty) Ltd versus Ltd
• Private company not as strictly controlled as public company in terms of
legal regulations.
The business trust
• Established out of an ordinary trust
• Has objective of conducting business for
profit
• Is not a juristic person
• Regarded as a separate tax payer
• Income tax on income according to the
conduit principle
• Transfer of the interest of a beneficiary
done by a variation of the trust deed.
The business trust
• How trusts are affected in terms of the Companies Act (No.
71 of 2008)
o Define business trust under juristic persons
o Unclear why this decision was made – perhaps to close loopholes
in legislation
Co-operative societies
• An autonomous association of persons who unite voluntarily to meet
needs by means of a jointly owned and democratically controlled
enterprise.
Co-operative societies
Advantages Disadvantages
• Co-operatives are juristic persons • Lack the managerial requisites of operating
• Members benefit from limited liability a business
• Any person may become a member • Members need some understanding of
• There is no restriction on the maximum financial management issues
number of members • Require mentorship and support to become
• The participatory nature contributes to the viable and remain sustainable
achievement of outcomes • Tension can develop in participatory
• Necessary services may be more accessible decision-making
• The business form is reasonably flexible • Business efficiency can be influenced
• Legislation is less stringent in its negatively due to conflicts
requirements • The short-term goals of members may
• Enable legislation facilitates the provision of contrast with the longer-term interests of the
support co-operative
Developing a business plan of a new
business
• The objectives of a business plan:
• Most important objective is to identify and describe the nature of the
new business opportunity or venture
• Second objective is to present a written plan of how the entrepreneur
plans to exploit the opportunity
• A third objective of the business plan is to attract investors, or to
persuade a bank or other institution or person who provides financial
resources, to lend the entrepreneur the money he/she needs to
establish the new business.
Developing a business plan
• Benefits of a business plan:
• Systematic, realistic evaluation of the new business’s chance of success
• Identification of the key variables that will determine the success of the
new venture
• Game plan for managing the business successfully
• Management instrument for comparing actual results against targeted
performance
• Primary tool for attracting money.
Importance and necessity of the business plan (reasons for writing a
business plan):
• To sell the business
• To obtain bank financing
• To obtain investment funds
• To arrange strategic alliances
• To obtain large contracts
• To attract key employees
• To complete mergers and acquisitions
• To motivate and focus the management team.
Stakeholders in a business plan
Internal stakeholders External stakeholders
• Management team • Customers
• Employees • Investors
• Banks
Stakeholders in a business plan
Matrix for evaluation of business plans
The scope of the business plan
• How much planning is needed?
• Consider the following:
• Style and ability of the entrepreneur
• Preferences of management team
• Complexity of the product or service being offered
• The competitive environment
• The level of uncertainty in business environment.
Format of the business plan:
• Determine who should write the plan
• Identify the necessary skills to write the plan
• There are no rigid rules regarding the format of the business plan
• Appearance is important
• Length depends on the type of business and can vary from 5 to 20
pages.
The content of the business plan
• The executive summary
• The general description of the venture
• The products-and-services plan
• The marketing plan
• The management plan
• The operating plan
• The financial plan
• The supporting materials.
Overview of a business plan
Outline of a simple business plan
A general description of the new venture
• Some important questions to address:
• Is this a start-up, buy-out or expansion?
• Has this business begun operations?
• What is the firm’s mission statement?
• Where was this business started?
• What is the basic nature and activity of the business?
• What is its primary product or service?
• Which customers are served?
• Is this business in manufacturing, retailing, service or another type of industry?
A general description of the new venture
• Important questions continued:
• What are the current and projected states of this industry?
• What is the business’s stage of development?
• What are its objectives?
• What is the history of this company?
• Which achievements have been made to date?
• Which changes have been made in the structure or ownership of the
existing business?
• What is the firm’s distinctive competence?
Analysing the market
• Market analysis involves the following key items:
• Concepts
• Identification of the target market/s
• Research and forecasting
• Marketing plan or strategy for the selected market segment/s.
Determining the financial needs of the
new venture
• Essential that the entrepreneur understands financial statements and
how to interpret them
• Entrepreneur must understand how profitability is assessed
• Entrepreneur must have the ability to determine the venture’s financial
requirements.
The location of the business: Location
factors
• Sources of raw materials • Availability of capital
• Availability of labour • Attitude, regulations and tariffs of local
• Proximity of, and access to, the market authorities
• Availability and cost of transport facilities
• The existing business environment
• Availability and costs of power and
• The social environment
water
• Climate
• Availability and costs of a site and
buildings. • Central government policy
• Personal preference.
Summary
• Legal forms of business
• Characteristics, advantages and disadvantages of different types of
entities
• Development of a business plan for a new venture
• Location factors.
