OH 34

1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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