New Companies Act will phase out CCs

Those people who run their businesses through Close Corporations (CCs) may be concerned that the new Companies Act of 2008, which will come into operation on 1st of April 2011, will force them to wind up their CCs and set up companies.

“This,” says attorney Tracy Pryce of Grant Gunston Attorneys (which operates from the Steenberg office park at the southern end of the Constantia Valley), “is an unfounded fear. It is true that the new Act will prevent any new CCs being established – but it allows for existing CCs to continue their operation.”

Close corporations, said Pryce, were introduced in 1984 to allow smaller businesses to operate without complying with many of the stipulations and regulations that apply to registered companies. To give just two examples, CCs do not have to have their accounts audited by a chartered accountant and they do not have to have compulsory meetings which are prescribed for companies. With the exception of an annual general meeting, there is no equivalent requirement for CCs - meetings are usually held between members as and when required.

If you are looking to set up a corporate entity to run your business after 1 April 2011, you will now have to go the company route. In terms of the new Companies Act, there will be four types of company, says Pryce. These are the public company (definitely not suited to a small businesses), the State owned company, the personal liability company and the private company – the (Pty) Ltd.

“Only the last,” said Pryce, “i.e. the private company, is the right vehicle for someone who had previously planned to set up a CC”. It can be formed with only one shareholder and one director and does not have to conform to ultra strict accounting rules, you do not have to appoint an auditor or a company secretary. Furthermore, in terms of the new Act, a private company can now have as many shareholders as wanted; previously there was a limit of 50 shareholders, although they still cannot offer the shares to the public.

Close corporations, said Pryce, were favoured by some businesspeople because they were simple to set up and run. A few years ago the law was amended to allow trusts to be members, thereby protecting assets from forfeiture – but only if natural persons were the beneficiaries of the trusts and provided that the number of natural persons entitled to receive benefits from the trust, when added to the number of members of the CC, did not exceed 10. If this number exceeds 10, members can become personally liable for all the debts of the CC. Neither of these limitations apply to private companies under the new Companies Act.

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