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As we all know, since the coming into effect of the Companies Act, 71 of 2008 and the subsequent changes to the Close Corporations Act, 69 of 1984, it is no longer possible to register a new close corporation (CC).
The intention behind this is for the legislature to streamline the differences between CC’s and companies and make the private company a more attractive form of business enterprise, going forward.
But, what happens if you still have an existing CC?
You will still be allowed to carry on business under a CC that existed before 1 May 2011. However, due to the many advantages of a CC now carrying over into the private company and the fact that a CC as a viable form of business entity, is fast becoming obsolete, you may want to think about converting your existing CC into a private company.
This article will unpack the advantages of converting your CC into a private company and how exactly to go about doing it.
Advantages of having a private company over a CC
A private company is a separate juristic person meaning that the shareholders have limited liability when it comes to the debts of the company.
You will still be allowed to carry on business under a CC, but there are certain advantages to converting your CC to a private company
Generally speaking, the personal assets of shareholders are kept separate to that of the company and their risk on liquidation of the company is limited to the value of their shares (ie the money they put in).
A juristic person may be a shareholder in a company thereby opening up the potential of more diverse structuring and investment opportunities. Membership in a CC, however, is restricted to natural persons only.
There is no restriction to the maximum number of shareholders in a private company (compared to a CC where members are restricted to a maximum of 10).
A private company provides an excellent vehicle for raising capital from investors.
Unlike a CC, a company has share capital (units into which a proprietary interest is divided) meaning that businesses aiming to get off the ground quickly or needing working capital can obtain funding in return for equity in the company on the agreed terms.
This way, companies get the promised cash injection and the investor is able to project its risk and return quite realistically based on the company’s performance.
Matters relating to the governance, control and management of the company are set out in the memorandum of incorporation of the company and/or the shareholders’ agreement.
This is especially important where the company has more than one shareholder or in the context of funding arrangements where the investor’s rights, duties, funding obligations and exit strategies can be clearly carved out and defined.
A private company generally only needs to have its financial statements independently reviewed as opposed to audited, making it very attractive from a management perspective.
In addition, a company that qualifies in terms of section 30(2A) the Companies Act for an exemption from independent review, can carry out its accounting obligations internally without the complement of highly qualified accounting team, whereas a CC, irrespective of size, still requires an accounting officer to be appointed.
The process of conversion
1.Memorandum of Incorporation (MOI):
The CC to be converted will require an MOI, which will serve as the constitutional document of the newly-formed company (previously evidenced by the CK1).
You can opt for a standard short-form MOI (form CoR 15.1A) issued by the Companies and Intellectual Property Commission (CIPC) or a bespoke MOI. It’s often advisable to go with the bespoke MOI because of the added protection it offers.
The Companies Act provides for a number of alterable provisions, which can be changed by the company’s MOI so that the substance and effect of various aspects governing the conduct of a company can be varied.
If these alterable provisions are not changed in the MOI, then the default position would apply (as in the case of a standard short-form MOI).
A custom-drafted MOI is able to alter the default position prescribed by the Companies Act allowing you to tailor various provisions to suit your needs.
2.Application to the CIPC:
In order to proceed with the application to convert the CC into a private company, the following documents (in addition to the MOI) will need to be prepared and submitted to the CIPC:
- Written resolutions of the members of the CC consenting to the conversion
- Application to convert a CC to a company (form CoR 18.1)
- Form identifying and appointing the initial director(s) of the company (form CoR 39)
- Confirmation of name reservation (form CoR 9.4) (if you wish to change the name of the CC)
- Auditors appointment form (form CoR 44) (if you wish to appoint an auditor for the company)
- Notice of change of financial year-end (form CoR 25) (if you wish to change the financial year-end of the company)
- Certified identity documents of all the incorporator(s) and director(s).
The effect of the above is to appoint the directors (previously members) and establish the share capital for the newly converted company (previously members’ interest) as well as to update the records of the former CC from a company secretarial perspective.
Once the conversion takes effect and the MOI has been accepted with the CIPC, the next step will be to issue shares to the new shareholder(s) where the newly constituted directors will pass the necessary resolutions authorising such issue.
Since the existing members will now also be the shareholders who will hold shares in the company in proportion to their previous members’ interest, share certificate(s) will need to be issued so as to evidence their shareholding in the company.
The transactions must also be recorded in the share register and properly maintained going forward.
If you are still operating as a CC, then it may be worth your while considering converting your CC due to the many advantages that the structure of a private company is able to offer.
*Ya-Fan Wong is an associate at Dommisse Attorneys
Featured image: Dommisse Attorneys associate Ya-Fan Wong (Supplied)