Close Corporation South Africa – A close corporation (or CC) is a type of South African legal entity which was usually chosen for smaller businesses. Under the new Companies Act of 2008, close corporations can no longer be registered and they will be phased out over time.
Close Corporation under South African Law
The Close Corporation is the simplest company type in South Africa. This article explains its basic structure.
The company type Close Corporation (hereinafter referred to as CC) is from an international perspective a rare type of a simplified limited liability company. It was introduced in 1984 and is still today the most popular legal form to conduct business within South Africa as well as over the borders. It represents a cheap alternative to the established limited liability companies with share capital, being the Private Company and the Public Company under the Companies Act. Though it will probably phased out under the Companies Act, it will still be valid for the next 10 years.
What is a close corporation?
A close corporation is a legal entity much like a company. A CC is run and administered by its members, who must be natural persons (i.e. not other legal entities). A close corporation’s members are like a company’s shareholders. In the past, the members of a close corporation usually chose the entity because it was cheaper and easier to administer than a private company ((Pty) Ltd). The business could be mature or a start-up, but it could only have a maximum of 10 members. In the past, companies used to have many regulations and requirements that made the entity difficult for small businesses. These extra requirements made the close corporation a much more attractive business form.
Close Corporation South Africa – Under the new Companies Act
The new Companies Act does not allow new close corporations to be registered anymore, but close corporations that already exist are still valid entities. If you are looking for an entity to govern your new business, you will need to register a company. The distinction between a CC and a company is being phased out, and private companies now offer many of the same benefits (and sometimes more) as old close corporations. It is easy to convert a CC to a company, and many larger close corporations have done so. In future, there will simply be small (old CCs and private companies) and large companies.
A CC has minimum one but maximum 10 members, being the owners of the company, due to the fact that this company type should be used for small scale entrepreneurs and business starters. Only natural persons can be members of a CC, a legal entity, no matter where incorporated, cannot be member of a CC. The Incorporation of a CC is initiated with the founding statement of the members. It contains the basic layout for the CC and can be amended later amongst the members by concluding an association agreement that is not accessible for any non-member.
Close Corporation South Africa – Name
A few weeks before the founding statement is lodged with the registrar of companies, an application for name reservation has to be made. Once the name is approved this reservation is valid for two months during which the founding statement has to reach the registrar. The name has to end on the letters ‘CC’ or ‘BK’, being the Afrikaans translation , while it is possible to check six name alternatives at the same time on the same form. For selecting a proper name the standard rules for naming a company apply. Besides the names of all members the name of the company has to feature on all business correspondence, s41 Close Corporations Act.
The rules of representation usually are fixed in the association agreement. The main difference between the CC and other types of company is, that it has no registered director, only a registered accounting office, who is not usually acting to represent the CC but rather to receive all relevant and official correspondence. In daily business the CC is usually represented by its members as long as they are not legally hindered to do so. Restrictions in representation amongst members are only valid if made known to the third party in question.
Due to the fact that the CC has got its own legal persona, the company is responsible for all its statutory as well as contractual and delictual liabilities. Under exceptional circumstances certain members may attract liability if behaving in contradiction to the law.
Liquidation and winding up
A CC may be resolved out of various reasons and by different parties. Beside the voluntary liquidation of a solvent CC based on an unanimous resolution , 50% of the members may lodge an application to the court to liquidate the CC. Other reasons are in the framework of the common law, such as insolvency, long-term dormancy or loass of all business. Finally a CC ceases to exist if converted into a Private or Public Company.
Financials and Audit
Other than for the Private Company the CC does not need to prepare audited year end balance sheets. A simple Overview of income and expenditures is sufficient to be submitted to the Receiver of Revenue (Taxman).
In essence the CC is a cheap and efficient company for business start-ups, small businesses and property holdings as long as this corporate form exists.