Keeping Close Corporations Close
In the last issue, we gave consideration to the sole proprietorship and the partnership as forms as business enterprise available to RMI members. In this issue, attention will be given to close corporations.
Since the advent of Close Corporations in 1985, this form of business entity has proven popular due to the fact that it is particularly suitable for conducting business as a small to medium enterprise. The formalities for the formation and maintenance of a CC are not very cumbersome and costs associated therewith relatively low.
The characteristics of a CC includes that all the members must be natural persons or trustees of natural persons and recently, also certain Trusts, subject to specific requirements. Each member is entitled to be involved in the business of the CC and has equal rights to manage and represent the Corporation. Under certain circumstances, the CC may buy members’ interests or may render financial assistance to incumbents for the acquisition of interests.
The Corporation is taxed at the current rate of taxation applicable to companies, but the distribution of profits to members is tax free in the hands of the recipients. However, such distributions do attract secondary tax on companies.
Some of the advantages are the following:
- It has a legal personality separate from its members and members are generally not liable for the debts of the Corporation and also enjoy the benefit of continuity;
- A single person may establish a Close Corporation and the object of the Close Corporation need not be that of making a profit;
- Simplicity of management as there is no separate Board of Directors or prescribed annual general meetings and informal decision taking is allowed;
- No statutory audit requirements exists, as financial statements must reflect the results of the business reasonably;
- Transfer and acquisition of members’ interests are not liable to stamp duty;
- The Act regulating CC’s is short and relatively uncomplicated (83 Sections) as opposed to the Companies Act (443 Sections).
Some of the few disadvantages are:
- Close Corporations are limited to ten members;
- Members run the risk of being personally liable for the debts of the Corporation if certain provisions of the Act are not complied with or if they placed the CC and its creditors unduly at risk;
- Every member is an agent of the CC and can act on its behalf and bind it to third parties and creditors.
In recent times, there is a movement towards scrapping the Close Corporation as a business form in favour of companies. It is important to note that amendments to the Companies and Close Corporations Acts were promulgated by the Corporate Laws Amendment Act, number 24 of 2006 and will come into effect on a date to be proclaimed. Members will be kept abreast of these developments as they occur.