What is a Close Corporation?
Close Corporations, or “CC’s”, are legal entities that could formerly be registered in South Africa, and were the ideal choice of trading entity for small businesses and some medium-sized businesses. Owned by “members” as opposed to shareholders, the entity offered flexibility compared to that of private companies, as compliance and legislation was less onerous for Close Corporations than private companies.
Under the new Companies Act of 2008, new registrations of Close Corporations are no longer permitted, but existing CC’s may continue to trade. The new Act makes provisions for converting a CC to a (Pty) Ltd and includes certain provisions that are applicable to CC’s. As a result, CC’s effectively must comply with both the Companies Act of 2008 and the Close Corporations Act of 1984.
“CC’S” ARE LEGAL ENTITIES THAT COULD FORMERLY BE REGISTERED IN SOUTH AFRICA,
and were the ideal choice of trading entity for small businesses and some medium-sized businesses.
Why Convert Your Close Corporation to a Private Company?
The principal reason for the introduction of Close Corporations in 1984 was to cater for owner managed operations that did not justify having the same administrative, secretarial and assurance requirements of a medium or large company, including the audit function. Under the (new) Companies Act of 2008, reporting standards are based not on whether the company is a public or private company in terms of its number of shareholders, but on the concept of public interest exposure, known as the PI Score. This test applies to all companies and all close corporations.
Upon conversion, Close Corporations must meet the Solvency and Liquidity Test—a compelling reason to ensure that the company is solvent, liquid and economically viable.
A converted Close Corporation enjoys the benefits of the Business Judgment Rule of Section 76(4), which applies to directors, not members (of a Close Corporation).
What are the new responsibilities of close corporations in terms of Schedule 3 of the Companies Act?
Close Corporations have new duties such as having to meet the solvency and liquidity test of section 4 of the Companies Act and are not permitted to trade recklessly. Trading whilst insolvent constitutes trading recklessly and therefore exposes the members of a Close Corporation to personal liability.
Close Corporations are subject to the PI Score in relation to the audit function.
Close Corporations must comply with the financial reporting standards of Section 29(5).
Close Corporations must have a Social and Ethics Committee if their PI Score is greater than 500 points.
Close Corporations with fiduciary assets in excess of R5m at any stage during the financial year must be audited.
Close Corporations are subject to the Business Rescue provisions of the Companies Act.
Close Corporations must comply with responsible governance, including the reckless trading provisions of Section 22.
