Close Corporations – Who Can And Cannot Become A Member?

Close Corporations – Who Can And Cannot Become A Member? post image

Every now and again we run into a business owner who wants to know whether he or she should transfer ownership of their close corporation to their family trust.
So while I’ve on the subject of close corporations I thought you might find this interesting!

Let’s start off with how many members are allowed…

A close corporation is allowed to have between 1 and 10 members (This bit I remembered from business economics in Matric! :lol: ).

Can juristic persons become a member?

A juristic person is a company or close corporation, and no, they cannot become a member of a CC.
Only natural persons can become members, however…
The following ‘persons’ are allowed:

  • An executor or administrator of an insolvent estate of a member. Either of these persons may be a company or close corporation.
  • A trustee of a testamentary trust. This trustee may be a company or close corporation but it may not be a beneficiary of this trust. This trust may also not be controlled by a beneficiary of the trust in question.

And what if I’m a trustee on my family trust?

A trustee of an inter vivos trust is also allowed to be a member of a CC.

And what’s the benefit of that?

Two benefits spring immediately to mind…

One – owning your member’s interest of a close corporation in an inter vivos (otherwise known as a discretionary) trust would ‘freeze’ the value in your personal estate.
Have I perhaps lost you?
Let’s assume that you sold your membership in a CC to your family trust for a cool million Rand. 20 years later and your share of that CC is now worth R20 million. Owning a R20 million asset in your personal estate could leave you with a massive tax problem. Currently only R3, 5 million of your estate which is not left to a spouse, is estate duty free.
So R20 million less R3, 5 million equals R16, 5 million. That R16, 5 million would attract tax at 20% which means R3, 3 million in taxes!

Now weigh this up against transferring ownership to a trust when your share was only worth R1 million. Since R3, 5 million is estate duty free, the R1 million would be free of all estate taxes!

Two – capital gains tax.
South African Revenue Services (SARS) was kind enough to grant the small business owner a capital gain tax exemption of R900, 000 but this is subject to certain conditions being met.
Anything more than this and capital gains tax is payable.

“Hang on a moment…I’m not going to sell me member’s interest so should I worry about capital gains tax?”
Yes and no.
You see, when you eventually pass away (and this happens to the best of us!), it’s viewed as a disposal for capital gains purposes.
You could effectively end up paying 10% tax on any gain in your member’s interest!

So now you have two good reasons to own a CC in a family trust, but…
There are two conditions!

  1. A juristic person such as a company or close corporation may not be a beneficiary of your trust.
  2. If the number of beneficiaries of your trust – when added onto the members of the CC – exceeds 10, then the membership of the trustee – and the trust – ceases permanently. Huh? Suppose the close corporation has 8 members including yourself as trustee of your trust, and your trust has 3 beneficiaries. Together this makes a grand total of 11 people which permanently disqualifies the trust from ever being a member again.

So there you have it in a nutshell!

Till next time…

PS: Once again I am deeply in gratitude to the authors of The South African Financial Planning Handbook 2011 which was used as a reference work.

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