Disadvantages of a Close Corporation in South Africa All forms of business ownerships have their Advantages and Disadvantages that one needs to take into consideration when forming your business.
Weighing the advantages and disadvantages of a CC will be very important when deciding what form of ownership will be best for your business in SA.
Below are some of the Disadvantages of a Registering a CC in South Africa: 1.
The Close Corporation Act of 1985 restricts the number of members of a Close Corporation to a maximum of 10, which limits the expansion of the establishment.
2.
Members of a CC can be personally held liable for the losses of the CC if the member acts irresponsibly on behalf of the business.
3.
When applying for a loan for your CC in South Africa, banks or other financial institutions might require the financial documents of the CC to be audited.
Financial aid will be considered only after the CC has been audited.
4.
It could be difficult for members to leave the CC or to pay a member their portion because all members must agree to dispose of a member's interest.
5.
Because every member may act as a representative or agent of the CC, the CC is bound by its member's actions, introducing a potential risk to the business entity! 6.
A CC cannot be sold to a company simply because a Company cannot be a member of a CC.
7.
If a South African Company wants to take ownership of a CC, the CC first needs to be converted into a company.
8.
A CC cannot become part of a group structure, meaning that a CC cannot become a member of a Company or another Close Corporation.
9.
Major decisions concerning the CC can be made by member/members who have a total membership of at least 75%.
Decisions like these must be in compliance with the CC agreement drawn up between the members of the CC.
10.
One of the main disadvantages of a CC in South Africa is that it's taxed as if it were a Company.
This means that the tax rates are substantially higher than tax rates that apply to partnerships and sole traders.
Conclusion It's highly recommended that you consider the ADVANTAGES and DISADVANTAGES of a Close Corporation in South Africa before deciding on what form of business to establish.