Converting a Close Corporation (“CC”) to a Company is a common business transition in South Africa and involves a change in the structure and legal status of the business. This is a short guide to help you navigate the process smoothly.
- Why Convert?
There are several benefits to converting from a CC to a Company in South Africa, including:
Shareholders of a Company have limited liability, which means their personal assets are protected from the company’s debts and liabilities. In a CC, members are jointly and severally liable, potentially putting their personal assets at risk.
Access to Capital
Companies may find it easier to attract investors and raise capital through share sales. This can be crucial for expanding the business, taking on new projects, or securing funding for growth.
Easier Transfer of Ownership
Transferring ownership or selling shares in a Company is generally simpler than transferring a member’s interest in a CC. This can make it easier to bring in new partners or facilitate changes in ownership.
Converting to a Company can make succession planning and estate planning more straightforward. It allows for the clear transfer of shares, which can help in ensuring the continuity of the business.
Attracting Skilled Employees
Companies often have the ability to offer share options or equity to employees, which can be an attractive incentive for skilled professionals to join the company.
Depending on the specific financial situation, there may be tax advantages associated with a Company structure, such as the ability to claim certain tax deductions or credits.
Credibility and Recognition
Companies are more recognised internationally, which can be beneficial if you plan to do business on a global scale or if you want to attract foreign investors.
- How to Convert
A CC may, in terms of Item 2 of Schedule 2 of the Companies Act No. 71 of 2008 (“Companies Act”) convert into a profit company having shares, i.e. a private company, a public company, or a personal liability company.
This is detailed process which involves an application to the Companies and Intellectual Property Commission (“CIPC”).
Step 1: Consultation and Decision-Making
Before you begin the conversion process, it is essential to consult with all CC members to ensure everyone is on the same page. The decision to convert should be unanimous, and all members must agree to the change.
Members of a CC are entitled to take up shareholding of the Company, but this does not have to be in proportion to the member’s interest that such person held at the time of conversion. The proposed shareholding of the Company must be discussed and decided on.
The members must also decide who the initial directors of the new Company will be. The members of the CC do not have to accept the appointment of a director at the conversion.
Step 2: Prepare a Memorandum of Incorporation
Prepare a new Memorandum of Incorporation (“MOI”) for the Company. The MOI is a crucial document that outlines the Company’s rules and governance structure and must comply with the Companies Act.
You can either adopt a standard MOI or have a customised version prepared. The standard version is prepared by CIPC.
Step 3: Adopt a Special Resolution
Hold a members’ meeting to pass a special resolution to convert the CC into a Company. A special resolution requires a 75% majority vote from all members.
This resolution should include:
- Approving the conversion
- Adoption of a new MOI
- Approving the filing of the conversion application with CIPC
- Confirming the shareholding of the new company
- Appointing and authorising a representative to sign all necessary documents
The resolution must indicate the interest of each member who approved and disapproved the decision. You must submit either the original or a certified copy of the resolution to CIPC.
Step 4: Name Reservation
If you wish for the Company to have a different name to the CC, you can change the name as part of the conversion process by filing a CoR 9.1 application.
Ensure that the name you choose is unique and complies with the naming rules of the Companies Act. You may apply for between 1 and 4 names. Each name reservation application costs R50 and since it is regarded as a filing fee and not an administrative fee, it is not refundable. It is advised that you do a free Trade Mark search and/or browser search to confirm the use of your proposed name before submitting it as part of your name reservation application.
The conversion application will only be processed once the name has been approved.
Your name reservation application is only registered or reserved upon written confirmation from CIPC in the form of a CoR 9.4.
Step 5: Prepare a Written Statement
At the time of the conversion, the CC must be solvent and may not subject to liquidation or in business rescue proceedings. If the CC is engaged in any of these proceedings, the application to convert will be rejected pending the finalisation of such proceedings.
A written statement in the form of a letter on the CC’s letterhead must be filed with the conversion application to confirm that that the CC is not in liquidation or engaged in business rescue proceedings.
At time of the conversion, all annual returns for the CC must be up to date.
Step 6: Prepare the Conversion Application
The following documents need to be prepared and submitted to CIPC as part of the conversion application and can be found on the CIPC website:
- CoR 18.1 for the application of the conversion
- CoR 9.1 for a new name or CoR 9.4 if the name has been reserved
- CoR 39 to appoint the initial directors of the Company
- Certified copies of the identity documents of the directors
- CoR 15.1A for a standard MOI or CoR 15.1B for a unique MOI
- New Memorandum of Incorporation (if not the standard form)
- Original or certified copy of the members’ resolution
- Written statement confirming the CC is not in liquidation or engaged in business rescue proceedings
The following documents may also be submitted with the conversion application where relevant:
- Form CoR 21.1 if a change in registered office is required
- Form CoR 25 if a change in financial year-end is required
- Form CoR 44 if a change in auditor, company secretary or audit committee is required
All forms must be completed using the name that the Company will be using after conversion.
Step 7: File Documents with CIPC
The above-mentioned documents are then submitted to the CIPC, along with payment of the applicable filing fee. The CIPC will review the application, and if everything is in order, issue a Certificate of Incorporation, indicating that the conversion is complete.
- Effect of Conversion
Item 1(4) of Schedule provides that upon conversion, the CIPC must cancel the registration of the CC and give notice of the conversion in the Government Gazette. Item 2(2)(a) of the Schedule states that the juristic person that existed as the CC before the conversion continues to exist as a juristic person but now in the form of a Company. Item 2(2)(b) further provides that all assets, liabilities, rights and obligations that vested in the CC or between the CC and its members, creditors or any third party will then vest in the Company.
- After Conversion
Once the conversion is approved, the following must be done:
- An inaugural meeting of the initial directors must be held to confirm the incorporation of the Company, the appointment of the directors, the registered office, the appointment of the public officer, the financial year end, the authorised share capital, and the allotment of shares and issuing of share certificates.
- If there is more than one shareholder, a shareholders’ agreement should be drafted.
- The share certificates must be issued.
- All business documentation, contracts, bank accounts, and licenses need to be updated to reflect the new Company status.
- The public officer must be appointed and registered with the South African Revenue Service.
It will also be important for legal, accounting and tax advice to be obtained for the new Company to ensure it continues to comply with relevant laws and regulations.
It is clear that converting a CC to a Company involves several steps, including obtaining unanimous agreement, legal compliance, and proper documentation. It is a process that requires careful planning and attention to detail. Seeking legal advice is recommended to ensure a smooth transition.
Contact us if you wish to embark on a conversion of your CC and require assistance.