Why Convert Your Close Corporation to a Private Company

why convert close corporation to private company

Close Corporations can no longer be registered

With the advent of the new Companies Act, 2008 from 1 May 2011, it brought to an end the right to register new Close Corporations. Concomitantly, the opportunity to convert existing Close Corporations to private companies has been granted by the new Act.

In terms of Schedule 3 Item A: Close Corporations Act, 1984 the new Companies Act, Act 71 of 2008 specifically brought out legislation to make certain sections of the Companies Act compulsory for close corporations. This means that close corporations have effectively to comply with both the Close Corporations Act and the Companies Act.

Should you advise your clients to convert their CCs to private companies?

Firstly, the principal reason for why close corporations were introduced in 1984 was to cater for the owner–managed type company that did not justify having the same administrative, secretarial and assurance requirements of a medium or large company, including the audit function.

However, with the new Companies Act reporting standards are based not on whether the company is a public or private company in terms of its number of shareholders, but on the concept of public interest exposure, known as the PI Score. This test applies to all companies and all close corporations.

What are the new responsibilities of close corporations in terms of Schedule 3 of the Companies Act?

  1. Close Corporations have new duties such as having to meet the solvency and liquidity test of section 4 of the Companies Act and are not allowed to trade recklessly. Trading whilst insolvent is trading recklessly and therefore exposes the members of a Close Corporation to personal liability.
  2. Close Corporations are subject to the PI Score in relation to the audit function.
  3. Close Corporations have to comply with the financial reporting standards of Section 29(5).
  4. Close Corporations must have a Social and Ethics Committee if their PI Score is greater than 500 points.
  5. Close Corporations with fiduciary assets in excess of R5–million at any stage during the financial year must be audited.
  6. Close Corporations are subject to the Business Rescue provisions of the Companies Act.
  7. Close Corporations must comply with responsible governance, that is no reckless trading of Section 22.

The OnlineMOI CC to Company Conversion MOI with Shareholders’ Agreement and Buy and Sell Agreement

It makes no sense for your CC clients to have the responsibility of complying with both the Close Corporations Act and the Companies Act.

Therefore to help our accountants, auditors, company secretaries and attorneys offer a full service to clients, we have developed a unique combination at exceptional value. For R750 ex VAT you get:

  1. A custom, compliant Memorandum of Incorporation
  2. A Shareholders’ Agreement
  3. A Buy and Sell Agreement

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