SA Business - The Current Position of Close Corporations

One of the major underlying objectives of the Companies Act of 2008 is vigorously to promote the development of the South African economy through simplifying the procedures for forming and maintaining companies and, more especially, small private companies which are comparable to close corporations. It is for this reason that, with effect from 1 May 2011, it is no longer possible either to register new close corporations or to convert companies to close corporations. An existing close corporation can, however, fairly easily be converted to a company.

It should also be noted that the new Companies Act has neither repealed the Close Corporations Act, 69 of 1984, nor abolished the institution of close corporations so that both the Companies Act and the Close Corporations Act will presently continue to exist concurrently. Close corporations will, however, be required to comply with the provisions of the Companies Act insofar as the Close Corporations Act has been amended by the provisions of Schedule 3 of the Companies Act. The intention, of course, is ultimately to see the complete phasing out of close corporations and, in addition, to facilitate the voluntary conversion of existing close corporations into companies. All changes to the particulars and/or membership of close corporations will continue to be effected in accordance with the provisions and requirements of the Close Corporations Act.

Existing close corporations, thus, have the choice of either continuing to operate and function in accordance with the provisions of the Close Corporations Act or to convert to a company and operate in accordance with the more flexible rules contained in the Companies Act.

The Companies Act directly impinges upon close corporations insofar as audit requirements, independent reviews and financial reporting standards are concerned. Close corporations are required to have a statutory audit when their ‘public interest score’ exceeds a certain amount.

In terms of regulation 26(2) of the Companies Regulations, 2011, the ‘public interest score’ is calculated as follows:

  1. a number of points equal to the average number of employees of the company during the financial year;
  2. one point for every R1 million (or portion thereof) in third party liability of the company, at the financial year end;
  3. one point for every R1 million (or portion thereof) in turnover during the financial year; and
  4. one point for every individual who, at the end of the financial year, is known by the company;
  • in the case of a profit company, to directly or indirectly have a beneficial interest in any of the company’s issued securities; or
  • in the case of a non-profit company, to be a member of the company, or a member of an association that is a member of the company.

The calculation of the ‘public interest score’, therefore, takes into account such factors as the number of employees and the annual turnover of the company as well as the number of individuals who have a direct or indirect interest in the securities of the company. The final score will determine the type of review that will be required in respect of the financial statements of the close corporation. It should be emphasised, however, that if the close corporation is an estate agent, as defined in the Estate Agency Affairs Act, the books and records of that close corporation must, in all instances, be audited by a practicing auditor.

It may, at the end of the day, prove to be more advantageous for many existing close corporations immediately to convert to companies. It is suggested that professional advice be obtained in this respect.

Courtesy: The EAAB - Estate Agency Affairs Board

“Redressing the Past, Building the Future and Guiding the Real Estate Business towards Professionalism”

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