A_02On 1 May 2011, the Companies Act 71 of 2008 came into effect, replacing the Companies Act 1973 and amending the Close Corporations Act of 1984. The New Companies Act introduced fundamental changes to South African company law. Regardless, the BIG question remains:

Why should I consider converting my close corporation to a private company?

Currently there is no legal or statutory requirement forcing Close Corporation’s to convert to a private company, however here are some reasons to consider;

  1. You cannot register Close Corporations anymore.
  2. Virtually all the advantages that a Close Corporations had, can now also be obtained by having a private company under the new Companies Act. For example:
  • the annual return fee is the same regardless of whether you have a Close Corporation or a company
  • small private companies do not need to be audited or produce audited financial statements
  • small private companies do not need to convene an annual general meeting (AGM).
  1. The converted Close Corporation will enjoy the benefits of the Business Judgement Rule of section 76(4), which applies to directors, not members.

Did You Know? The Business Judgement Rule affords protection to directors who have relied on the professional opinions of accountants, attorneys, and other business advisors, that influenced their business decisions and that turned out not to be in the best interests of the Company. This protection is not enjoyed by the members of Close Corporations.

  1. Companies cannot be members of a Close Corporation.
  2. If your company deals with international clients, a Close Corporation is not recognised as a Company format, they find Close Corporations foreign as its only unique to South Africa.
  3. Close Corporations are limited to only 10 members.
  4. In Close Corporations the responsibility, risk and liabilities falls on the members, however in a Company it falls on the directors.
  5. Close Corporations are also subject to the public interest score (PIS) under the new Act.
  6. Both Close Corporations and Companies must file Annual Returns.
  7. Close Corporations that converted to a company and are owner managed with a PIS less than 100 do not have to comply with any third party financial reporting standards but only the requirements of the Companies Act as per section 27 – 30.
  8. All Close Corporations must meet the requirements of the Close Corporation Act and certain sections of the new Companies’ Act.
  9. Close Corporations must meet the solvency and liquidity test of section 4 of the new Companies Act before converting.
  10. Close Corporations do not separate the rights and responsibilities of owners and managers, as they are both members with the same risks and liabilities, whereas the new act clearly distinguishes shareholders from directors, their roles, responsibilities, rights and risks.

What is the future of Close Corporations?

  1. The 2008 Companies Act provides that no new close corporations may be incorporated.
  2. Close Corporations that were in existence at the time that the new Act came into effect and were registered as of the effective date of the new Act i.e. at 1 May 2011, may continue to exist indefinitely.
  3. Since the Companies Act and Close Corporations Act run concurrently with each other, Close Corporations must apply the principles of both acts.

After taking into consideration the reasons why I should be converting my Close Corporation into a Private Company as set out above, the author believes very few Close Corporations will be in existence 10 years from now.

Louis Meyer

CA(SA) MCom

Director

For more information about your Close Corporation or Company requirements please visit www.shelfcompanies.co.za or call 011 672 0020.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)