ABOUT CLOSE CORPORATIONS

1
ABOUT CLOSE CORPORATIONS

• Study units 8, 9 and 10 require an understanding
• Study unit 11 requires the ability to apply the
  knowledge
• Juristic person
• Meant for smaller enterprises
• Less complex
• Registrar of companies
• Key concepts
• Members
• Accounting officer
• Members contributions
• Founding statement
• Max ten members, minimum one

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ABOUT CLOSE CORPORATIONS

• Nature of close corporations
• Limited liability - maximum liability of members
  equals their contribution to it
• Separate legal existence
• Distinct and independent from members
• Not reliant on its individual members for
  existence
• Only natural persons can become a member thereof
  (companies therefore can't)
• Can acquire rights and obligations in its own
  name
• Own assets, sue and be sued in its own name

3
ABOUT CLOSE CORPORATIONS

• Management is simpler - no formal procedure, only
  a signed resolution required
• No need to submit Annual Audited Financial
  Statements (can be costly)
• No returns to Registrar required as one would
  with a company
• Single document - 'Founding document'
• Drawbacks
• Easier to commit fraud or improper action with
  due to lack of controls
• Every member can act on its behalf and incur
  liability

4
ABOUT CLOSE CORPORATIONS

• Formation
• Founding statement, see page 115 for list
• Registration number
• Optional internal relationship between members
  association agreement
• Conversion
• Conversion from a company to a close corporation
  (rare)
• Conversion from a close corporation to a company

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ABOUT CLOSE CORPORATIONS

• Conversion from a company to a close corporation
  (rare)
• Every member of the company must become one of
  the close corporation
• Statement on the values and that the entity will
  remain solvent
• Auditors statement that there are no Material
  Irregularities
• Founding statement
• Notice in Government Gazette of conversion
• Registrar must also give notice in that Gazette

6
ABOUT CLOSE CORPORATIONS

• Conversion from a close corporation to a company
• Written consent of all members
• Registrar must give notice in the Gazette
• Section 63 of the Companies Act i.e. memorandum
  and articles
• Cancel the founding statement
• Statement that the company will be solvent and
  share capital does not exceed net assets over
  liabilities
• Statement by accounting officer that not aware of
  any contraventions

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MEMBERSHIP MANAGEMENT

• Membership
• Exceptions to rule
• Testamentary trust member
• Administrator/executor/curator of an estate
• Members interest and contributions
• Remember your partnership aspects
• Profit share member interest effectively
• Members Contribution capital effectively

8
MEMBERSHIP MANAGEMENT

• Aspects
• An interest can be acquired by
• buying from another
• giving a contribution
• Members interests must sum to 100
• Percentage interest determined by agreement
• Financial assistance to acquire a stake is
  allowed
• Important elements
• Contributions by members
• Accumulated profits
• Surplus on revaluation of assets

9
MEMBERSHIP MANAGEMENT

• What requirements have to be met to distribute
  net profits?
• Solvency requirement
• Assets exceed liabilities
• Liquidity requirement
• Must be able to pay debts as they fall due
• Payment of distribution must not cripple its
  ability to do so
• Formal approval by resolution required

10
MEMBERSHIP MANAGEMENT

• Management
• Association agreement
• Governs membership participation in aspects like
  borrowing powers, as well as other areas like
  disputes, interests and contributions
• Between members
• Page 123 for full details thereof
• Absence of such matters means Close Corporation
  Act governs
• Then all members participate
• Dont forget founding statement

11
TAX, DEREGISTRATION AND LIQUIDATION

• Tax
• Treated as if a company by tax authorities
• Therefore use 29 rate
• Secondary Tax on Companies and Provisional Tax
  applicable to it
• Deregistration and liquidation
• Registrar may wind up if decides so 60 days to
  object
• Government Gazette
• Liquidation much like a companies

12
ACCOUNTING RECORDS

• Key concepts
• Loans from members
• Loans to members
• Accumulated profits
• Accounting officer
• Accounting records and financial statements
• Duty to keep financial records that represent the
  state of affairs of the operations
• Records

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ACCOUNTING RECORDS

• Accounting records required
• Assets and liabilities
• Register of fixed assets
• Cash entries
• Credit purchases and sales as well as their
  details
• Annual inventory stocktake
• Records of the stocktake
• Vouchers supporting all entries
• Additional required
• Members contributions, accumulated profits, loans
  and revaluations of non-current assets

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ACCOUNTING RECORDS

• Additional duties
• Must adequately protect assets
• Must take reasonable steps to do so
• Competent and reliable person as the accounting
  officer

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ACCOUNTING RECORDS

• Must show separately the movements and totals of
  the following per the Close Corporation Act
• Members contributions/interest
• Accumulated profits
• Revaluations of non-current assets
• Loans to and from members
• Percentage interests

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ACCOUNTING RECORDS

• Must also show the following per the SAICA
  guidelines
• Statement of net investment by members as a note
  to members interest
• Description of transactions with members that
  were taken into account in determining net profit
• Remember that since a CC is a juristic person the
  members contributions, surpluses and retained
  incomes dont belong to any specific member
  unlike a partnership!

17
CLOSE CORPORATION OTHER

• The Close Corporation Act does not include
  specific disclosure requirements like GAAP does
• But one should still do the relevant disclosure
  and comply with following
• Going concern concept
• Matching concept
• Prudence concept
• Consistency concept

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ACCOUNTING OFFICER

• Must be a member of a recognised professional
  accounting body
• Accounting Officer must
• Determine if the Annual Financial Statements
  agree to the records
• Determine if the accounting policies used are
  appropriate
• Report to the members in both respects