Characteristics of a Close Corporation in South Africa?
A close corporation (CC) is a type of business entity that was available in South Africa before the implementation of the Companies Act, 2008. Although the creation of new close corporations has been discontinued since May 2011, existing CCs can continue to operate.
Here are the key characteristics of a close corporation in South Africa:
Limited Liability
Limited liability is one of the most significant features of a close corporation. Members of a CC are not personally liable for the debts and liabilities of the corporation beyond their capital contributions. This means that their personal assets are protected in the event of business failure.
Number of Members
A close corporation can have between 1 to 10 members. These members are essentially the owners of the CC. This limited number allows for a more manageable and intimate business structure, ideal for small to medium-sized enterprises.
Membership
Membership in a close corporation is limited to natural persons. This means that only individuals, not other companies or juristic entities, can be members of a CC. This ensures that the business remains small and closely held.
Legal Personality
A close corporation has a separate legal personality from its members. This means that the CC can own property, enter into contracts, sue, and be sued in its own name. This separation provides a clear distinction between the business entity and its owners.
Simplified Management Structure
Close corporations have a simplified management structure. There is no requirement for a board of directors or formal meetings like in companies. The members collectively manage the business, making decisions through mutual agreement.
Flexibility
The flexibility of a close corporation is one of its appealing characteristics. Members can easily make changes to the ownership structure, such as transferring membership interests. This can be done without the formalities required in a company structure.
Financial Statements and Audits
Unlike companies, close corporations are not required to have their financial statements audited, unless specified in the founding statement or if required by a professional or regulatory body. This reduces administrative costs and simplifies compliance.
Founding Statement
A close corporation is formed by filing a founding statement (CK1 form) with the Companies and Intellectual Property Commission (CIPC). This document outlines the basic details of the CC, such as the name, principal business activities, and details of the members.
Continuity and Transfer of Membership
The continuity of a close corporation is not affected by changes in membership. The CC continues to exist even if there are changes in the membership, ensuring stability and longevity of the business. Membership interests can be transferred with the agreement of existing members, providing flexibility in ownership.
Taxation
Close corporations are taxed as separate legal entities. They are subject to corporate tax rates on their profits. Members may also be subject to personal income tax on any distributions they receive from the CC.
Key Facts and Real Information
- Discontinued New Registrations: New close corporations cannot be registered after May 2011, but existing ones can continue to operate.
- Limited Liability: Protects members’ personal assets.
- Membership Limit: 1 to 10 natural persons.
- Simplified Compliance: No audit requirement unless specified.
- Separate Legal Entity: Can own property and enter into contracts independently.
Close corporations in South Africa offer a unique blend of limited liability, flexibility, and a simplified management structure. They are particularly well-suited for small to medium-sized enterprises. Despite the discontinuation of new CC registrations, existing close corporations remain an important part of the South African business landscape, providing an accessible and manageable business structure for many entrepreneurs.