Learning Objectives Analysing the Rules Pertaining to a Close Corporation by: Comprehending the legal nature of a Close Corporation Interpreting the formation, Membership and capital of a Close Corporation Interpreting the advantages and disadvantages of a Close Corporation Examining accounting and taxation requirements of a Close Corporation Examining the limitations of the Close Corporations Act and the Banking requirements of a Close Corporation OH 34

Criteria Analyse the Rules Pertaining to a Close Corporation Define a Close Corporation Describe a Close Corporation as a legal entity Describe the winding-up of a Close Corporation in terms of Sections 68 and 69 of the Act List the registration requirements of a Close Corporation List the contents of the Founding Statement of the Corporation List the requirements of the Members of a Close Corporation Describe the liability of the Members of a Close Corporation List the individuals who may not participate in the management of a Close Corporation Describe the capital of a Close Corporation OH 35

Criteria (Continued) Analyse the Rules Pertaining to a Close Corporation List the advantages of a Close Corporation List the disadvantages of a Close Corporation List the records and registers to be kept and maintained by a Close Corporation Describe the taxation of a Close Corporation Describe the limitations of the Close Corporations Act with regard to: Section 40 Section 52 Section 55 Judge the contractual capacity of a Close Corporation OH 36

Definition of a Close Corporation 2(1) Any one or more persons, not exceeding ten, who qualify for Membership of a Close Corporation in terms of this Act, may form a Close Corporation and secure its incorporation by complying with the requirements of this Act in respect of the registration of its Founding Statement referred to in Section 12   The Oxford dictionary defines a Corporation as: A group of people authorised to act as an individual and recognised in law as a single entity, especially in business OH 37

Registration of a Close Corporation Close Corporation is created by the registration of a Founding Statement Once the Founding Statement is lodged, a Certificate of Incorporation will be endorsed thereon The Registrar must be informed of any: Change in the number of Members or change in Membership Change of registered address of the Close Corporation Appointment of a new Accounting Officer OH 38

Founding Statement of a Close Corporation The Founding Statement must contain the following particulars: The full name of the Corporation and a shortened form of that name The principal business to be carried on by the Corporation The postal and registered address of the Corporation The full name of each Member, his/her identity number or date of birth and residential and postal address The size, expressed as a percentage, of each Member’s interest in the Corporation Particulars of the contribution of each Member to the Corporation The name and postal address of a qualified accounting officer The date of the end of the financial year of the Corporation OH 39

Members of a Close Corporation A Close Corporation may only have natural persons as Members There may not be more than 10 Members A Close Corporation may be a shareholder in a Company and may even become a Holding Company Members have interest in the Corporation, not shares as in a Company The joint interest of the Members must total 100% Interest of the Members is determined by mutual agreement If the Corporation has two or more Members, they may enter into an association agreement Members are not liable for the debts of the Corporation The Act provides for Members’ personal liability if they abuse the Corporation by carrying on the business fraudulently OH 40

Advantages of a Close Corporation 1. It is relatively uncomplicated and inexpensive to establish a Close Corporation 2. The only statutory documents required are the Founding Statement and the Certificate of Incorporation 3. A Close Corporation does not require a full audit – only a review by the Accounting Officer 4. A Close Corporation is governed by the Close Corporations Act, which is less complex than the Companies Act 5.  Members of a Close Corporation have limited liability 6. Close Corporations enjoy perpetual succession 7. The Members participate actively in the management of the Corporation OH 41

Disadvantages of a Close Corporation A Close Corporation is taxed separately at a rate of 30% deducted from the profits that are paid to the Members Members pay an additional 15% tax on dividends The limited liability is fragile and can be lost fairly easily, making the Members joint and severally liable A juristic person, for example a Company, may not be a Member of a Close Corporation Membership of a Close Corporation is limited to 10. This can hamper the growth and expansion of the Corporation Any Member can bind the Corporation contractually without prior written consent of the other Members, except in instances as required by the Act OH 42

Accounting records The Act requires a Close Corporation to keep comprehensive records of its business activities Records to be kept includes the following: Records reflecting assets and libialtities; Members contributions; loans to or from Members Register of fixed assets, including cost prices and depreciation Records detailing daily cash receipts and cash payments Records showing all transactions for which credit has been granted/received Records of annual stocktaking Vouchers/source documents evidencing the accounting entries and records OH 43

Limitations of the Act Limitations of the Close Corporations Act includes: Section 40: Financial assistance by Corporation in respect of acquisition of Members’ interest Section 52: Prohibition of loans and furnishing of security to Members and others by Corporation Section 55: Application of Sections 37 and 336 of the Companies Act OH 44