A close corporation may, in terms of item 2 of Schedule 2 of the Companies Act 2008, convert into a profit company having shares, i.e. a private company, a public company or a personal liability company. The new Companies Act 2008 came into force on 1 April 2011.
Subsequent to the changes to the Companies Act and the resultant changes to the Close Corporations Act, there are fewer differences between a company and a close corporation.
Under the new law private companies can no longer convert into a close corporations and new close corporation’s can no longer be registered. Although existing close corporation will continue to exist indefinitely there is the current option of converting your close corporation to into a company for professional or other business reasons.
The conversion is not automatic, but is an administration process which an accounting officer must follow through at the CIPC office. Written consent signed by the members of the close corporation holding in aggregate at least 75% of the members’ interest is required.
After the conversion at the CIPC, the members of the close corporation will become shareholders and managing members may be appointed as directors in the “new” company. Membership in a close corporation is restricted to natural persons. A company shareholding can be made up by natural persons and other companies.
There is also the view that members close corporation are held personally liable for debt of the close corporation , whereas in a company, the business rules for directors gives the directors more protection than the members of close corporation .
If your close corporation needs further finance or investments to grow, obtaining funds from shareholders, conversion into a company should be considered.
Another difference between a close corporation and a private company is the audit requirement. Audited or independently reviewed financial statements may be more relied on by banks, etc. However the audit for a private company is not compulsory. If your close corporation or company reaches a public interest score over a certain level an audit is required. The rules on how to calculate the public interest score will not be explained in this article.
Most small companies will not require an audit or an independent review by an auditor or a close corporation’s accounting officer, the latter already used by the close corporation for statutory compilation reporting.
From a SARS point of view nothing major should change, close corporation’s already and always used “Company Tax Return ITR14” for filing.
Dirk Vosloo
dirk@taxadmin.co.za tel 082 568 0886
