This is nothing new, but many people forget it: companies, such as a (Pty) Ltd company, are prohibited from owning any members’ interest in close corporations (“CCs”). As such, when a company does want to do so, the CC must first be converted into a (Pty) Ltd company to allow for that.
Trusts, however, are allowed to own members’ interest in a CC (subject to certain conditions), which is very useful for many people’s estate planning structures. Natural persons are, of course, also allowed to own members’ interests in a CC.
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Since the Companies Act, 71 of 2008 came into effect, no new CCs can be incorporated, but those that already exist can continue trading for an indefinite period, or elect to convert to one of the forms of company provided for in the Companies Act.
Because the costs and ease of operating a CC are now the same as for a company (where, in the past, they were more onerous for companies), there is no material benefit to continuing to use a CC.
As such, converting to a company is acceptable and often preferred by many members of CCs. I far prefer the clear distinction under the Companies Act between
i. the rights and obligations of shareholders versus directors, to the more fluid position in CCs where every member is entitled to participate in the business of the CC and has an equal right to manage the business.
ii. the potential personal liability of directors versus shareholders. If there is more than one member in a close corporation, I would recommend considering converting to a company.
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In either case, we can assist with amending a CC’s association agreement, a company’s memorandum of incorporation and a shareholders agreement to record the required balance of powers between the members in the CC, or the shareholders and the directors in the company.
Converting a CC to a company at the Companies and Intellectual Property Commission is relatively easy and cost-effective. Of course, there is further administration that arises with respect to notifying debtors, creditors, banks and clients of the name and registration number change.
Written by Abigail Reynolds (Corporate & Commercial Law Specialist)
This article was originally published by Reynolds Attorneys
