Article by listed Attorney: Nanika Prinsloo
Although one cannot register a new Close Corporation after 1 May 2011 anymore, there are still plenty of people who own and operate Close Corporations. It is not uncommon to find persons who own a Close Corporation who don’t understand how a Close Corporation really works.
We give you a series of articles on the inside workings of a Close Corporations: what is important, what is not, what are the tax implications, how does a Close Corporation come to an end, what is an Association Agreement and a few other topics such as The Liability of CC Members.
This article will explain in general how a Close Corporation works.
A Close Corporation is a legal entity with its own persona. To have its own persona means that, although it is not an individual person, it can act as if it is a person and certain rights and obligations are conferred to it, seperate from its members, from the moment it is registered. A Close Corporation is registered in terms of the Close Corporations Act 69 of 1984.
A Close Corporation has members and a Company has shareholders and directors. The Close Corporation has its own estate seperate from its members. (An estate consists of all the assets i.e. cash, movables, building, vehicles, investments, debts, liabilities, everything that a person or an entity owns.) The debt of the Close Corporation belongs to the Close Corporation and the debt of the members that they incur in their personal capacities is not the debt of the Close Corporation as well, it remains their own debt seperate from the Close Corporation.
It offen happens that a member signs surety for the debt of the Close Corporation. If the Close Corporation does not pay its debt, then the suretyship will be called up and the member will have to pay the debt of the Close Corporation. That will only happen if the member signed surety for the debt of the Close Corporation. If the member did not sign debt then he/she will not be liable to pay the debt of the Close Corporation.
A Close Corporation has members. It can have only one member or it can have up to ten, and no more than ten, members.
The members of a Close Corporation can be either a natural person, or a Trust.
We mentioned in the beginning of this article that no new Close Corporations can be registered after 1 May 2011. That only pertains to new Close Corporations, as Close Corporations that were registered before that date, carries on as usual and will carry on indefinitely or until it is liquidated or if the members decide to close it down, or in short: until it is deregistered for whatever reason. Originally the government said that they want to phase out Close Corporations altogether, and only have Companies as entities. The idea was that Close Corporations keep on running for the next ten years after 1 May 2011, whereafter all Close Corporations would be converted to Private Companies. The new Companies Act of 2008 was promulgated and at the moment companies are registered in terms of the new Act. Nowadays Companies are not as difficult to manage as it used to be and the requirements are less. Whether Close Corporations are going to be phased out after ten years or not will have to be seen and until new leglistation is promulgated in this regard, Close Corporations will exist indefinitely.
Close Corporations can be converted into Private Companies at any time. Let’s look closer at how that works.
We mentioned above that a Close Corporation can convert into a private company at any time. This conversion will take place in terms of the Companies Act of 2008 and the Close Corporation must comply with the following requirements before it can convert itself into a company:
a) At least 75% of the members who hold an interest in the Close Corporation must confirm in a written statement that it approves of the conversion;
b) There must be a Memorandum of Incorporation; (each company must have one)
c) The prescribed filing fee must be paid.
d) The prescribed forms must be completed.
The Close Corporation is thereafter converted by completing forms and filing the conversion documents with the CIPCO, where the conversion is registered.
A Close Corporation is a seperate legal entity and must register for Income Tax and can register for VAT.
Once a Close Corporation is registered and it does not hand in tax returns, the Close Corporation is automatically deregistered by SARS. If your Close Corporation is dormant, but you want to keep it as a vehicle for when you need it, it is imporant to lodge tax returns religiously, otherwise it will be deregistered and you won’t be able to use it.
If there is more than one member, the single most imporant document for the Close Corporation is the Association Agreement. The Association Agreement is the agreement in which the members’ rights and obligations towards each other and towards the Close Corporation, percentage of membership and everything that pertains to the agreements made between the members is regulated. It can be very problematic if there is no Association Agreement and the members are upset with each other.
The Association Agreement is preferably signed before the Close Corporation is registered, but can be drafted and signed afterwards. If you have a Close Corporation and there is more than one member and no Association Agreement, take this free advice and arrange for an Association Agreement to be drafted and signed immediately, to avoid future problems. If one of the members dies, it is imperative that there is an Association Agreement that makes provision for what will happen in such an instance. It is also advisable that each member leaves his/her membership in his/her will to the remaining members or sell it to them in a buy and sell agreement.
If a member dies, his/her membership in the Close Corporation will devolve in terms of his/her will if there is no Association Agreement or buy-and-sell agreement in place. This can mean that the remaining members can end up with a family member or person they did not want as member or do not like. Even worse, if there is no buy-and-sell agreement in place, and no policy taken out for this,, the remaining members can end up having to borrow money to buy out the deceased member’s membership in the Close Corporation and this can cause a cash flow problem for the remaining members.
A Close Corporation comes to an end when :
a) The members agree to end it
b) The Close Corporation is liquidated
c) The final end is when it is deregistered.
Where the members decide to close down the Close Corporation, all the debts will be settled, the bank accounts closed, the assets sold and staff retrenched. It is very important that the last tax return for the Close Corporation is handed in to SARS (South African Revenue Services) and that SARS is advised that the Close Corporation will be deregistered. The income tax and VAT numbers at SARS must also be deregistered as soon as SARS has given an approval for the deregistration (meaning that there are no outstanding taxes). All creditors must be informed as well and settled. Once all this is done, the Close Corporation can be registered.
If the Close Corporation is insolvent and it has to be liquidated it will be deregistered as soon as the final liquidation order has been granted by the High Court.
A Close Corporation can also be placed under business rescue if it experiences financial problems, to try and nurse it back to a solvent state.
As soon as CIPCO has completed the deregistered, the Close Corporation has ended.
Read our other articles about Close Corporations for more information.
This article was written by Nanika Prinsloo of Prinsloo and Associates Attorneys and Conveyancers.
Cell: 072 8558 106