Before you convert, compare the practical differences between Close Corporations and Companies

What are the differences between CCs and Companies

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Subsequent to the effective date of the Companies Act 71 of 2008 (the Act) and the resultant changes to the Close Corporations Act 69 of 1984 (the CC Act) the differences between Close Corporations and Companies and how they are impacted by legislation has been greatly reduced.

If your Small Business is registered as a Close Corporation, the thought of converting to a Company might have crossed your mind several times.

Since Close Corporations are no longer an option to register for, many Close Corporations are still actively in business today.

Before you make any emotional decisions on the reasons why you need to convert to a Company, let us dig deeper into the comparisons between these two entities and assess the tax implications on both.

Companies Act vs CC act

It is clear from the changes to the Act and the subsequent moratorium on registrations of close corporations (CCs) that it is the intention of the government to make private companies a more attractive business entity for smaller businesses and reduce the need for CCs.

Let’s start to compare the differences in the Companies Act versus the CC Act:

  1. In the Companies Act, an owner-managed company, small enough to qualify for section 30(2A) of the Act, is exempt from independent reviews
  2. A CC, irrespective of size, still requires the appointment of an Accounting Officer
  3. Accounting Officer duties include the compilation of Financial Statements as set out in section 62 of the CC Act
  4. The Companies Act {section 76} provides for what is known as the business judgment rule. Directors of private companies are able to take advantage of this protection
  5. The CC Act does not provide the same protection to members of a CC as for directors and shareholders of a Company – tax liabilities becomes personal liabilities of the member
  6. Private Limited Companies can include up to 50 Directors and unlimited shareholders which attributes to the expansion of the business in future
  7. Membership in a CC is restricted to only natural persons and up to 10 members which could inhibit the expansion of the business in future
  8. Personal assets of shareholders are kept separate from that of the company and their risk of liquidation of the company is limited to the value of their shares
  9. A juristic person may be a shareholder in a company thereby creating the potential for more diverse structuring and investment opportunities
  10. Members’ interest is expressed as a percentage eg. 100%
  11. Shareholders interest, in percentage, is expressed as Capital Amounts or Equity
  12. Matters relating to the governance, control, and management of the company are set out in the memorandum of incorporation of the company and or the shareholders’ agreements
  13. A private company generally only needs to have its financial statements independently reviewed as opposed to audited – making this a very attractive option from a management perspective
  14. A private company provides an excellent vehicle for raising capital from investors

For Income Tax purposes, a CC will be treated just like a Company –

so they are bound by the same taxation implications as Companies irrespective of their size, profit, or industry type

Business Model

Looking at trends in the corporate landscape, the use of a Close Corporation for a business framework might indicate that lower levels of regulation are measured.

Prior to 2011, no Close Corporation was subject to an audit requirement and this made it an attractive choice for those who did not like to be looked at too closely.

The rules regarding the administration and governance of both these entities are now very similar.

While an audit was applicable only to companies in the past, it now has exactly the same impact on Close Corporations. If your Close Corporation has a public interest score over a certain level an audit is required. This audit is performed to the exact same standards as applicable to a company.

Learning from past mistakes and taking the matters discussed into consideration, it may be in the best interests for some businesses to convert from a Close Corporation to a Private Limited Company.

The opportunity to convert does exist and is more inviting than any point under the previous Companies Act.

If you need further advice on the differences between Close Corporations and Companies, or you need to convert your Close Corporation to a Company, do reach out to me for ways on how I can assist with your statutory compliance solutions.

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