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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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