Please note that since this book was last published in 1997 some of the laws that have been referenced may have changed. We
are doing our best to update the articles, however, it is advisable that you to consult an attorney before relying on any information contained herein.
Introduced in 1984 by the Close Corporations Act, a close
corporation is defined as a legal person' separate from its
members, owning the assets and incurring the liabi-lities and
obligations of the business in the same way as a company (see companies). In this way the twin
benefits of limited liability and perpetual succession enjoyed by
a company are conferred, but they are conferred more simply and
inexpensively. The close corporation may have no more than 10
members, who, as a general rule, must be individuals (in legal
terms, natural person). The
only other person that may be a member of a close corporation is
a testamentary trust, acting
through its trustee; in that instance, however, a juristic person (such as a
company) may not be a beneficiary under the trust. There is thus
a general prohibition against a legal' or juristic' person being
a member of a close corporation.
A company may therefore not be a member of a close
corporation, nor may a close corporation be a member of another
close corporation, even though a company may, for example, hold
shares in another company and a close corporation may have only
Instead of holding shares each member acquires an interest in
the corporation, expressed as a percentage. The founding members
of a close corporation will each have to make an initial
contribution (which need not be in money) to it. As with the
company, there is no minimum contribution laid down, and nothing
to prevent members from limiting their contributions and
therefore their risk.
Members may elect to put more money into the close corporation
by way of loans so as to receive benefits as creditors instead of
To become a member of a close corporation, you can acquire an
interest from an existing member or make a contribution to the
close corporation itself in return for obtaining an agreed
percentage interest in it.
Formalities and formation expenses
State authority is required for the creation of a close
corporation. The Close Corporations Act, 1984, lays down the
requirements that have to be met in order to achieve
incorporation. Essentially, the re-quisite number of persons can
form a close corporation simply by registering a founding
statement with the Registrar of Close Corporations in Pretoria.
On registration, the registrar is required to issue a
certificate of incorporation to serve as evidence that the close
corporation has been formed.
Other formalities associated with the registration of
companies are also drastically reduced or eliminated. For
instance, the address of the registered office of the close
corporation (which must be a street address) as well as its
postal address are mentioned in the founding statement itself;
the need for any further documen tation in this regard, which is
always required in the case of a company, is therefore
This brevity and simplicity is made possible largely because
the Close Corporations Act provides for the way in which a close
corporation is to be run internally. This eliminates the need for
any prior agreement on the matter. Furthermore, the internal
structure of a close corporation is a lot simpler than that of a
company, as there are no directors.
Flexibility is, however, provided, as the statutory rules
apply only in the absence of contrary agreement - an association
agreement can therefore be entered into by the members, providing
for matters to be done differently.
Naming the close corporation
Close corporations must have a name and be allocated a
registration number by the Registrar of Close Corporations.
This name and the registration number of a close corporation
must be displayed conspicuously in easily legible characters
outside the registered office and every place in which the
business is conducted. Furthermore, as in the case of companies,
the registration number and the name must be used, in legible
characters, in documents such as official publications, letters,
invoices, receipts, delivery notes, and all bills of exchange,
promissory notes, endorsements, cheques, and orders for money or
goods'. The Close Corporations Act specifies that official
publications' include advertisements, and that an order' includes
an order for services'.
It is possible for a close corporation to register a literal
translation of its name into another official language, and
shortened forms of its name in an official language. Use of
either full version is permitted, but not the use of the
shortened form on its own. Names can be changed at any time.
A number of statutes prohibit the use of certain words in
business names. For example, no one may use a name implying that
he or she is an attorney, notary or conveyancer if this is
not true; a business name may not include the words government',
state', or United Nations'; and the use of the word bank' is
prohibited unless the person using that term is registered as a
The name of a close corporation must have the abbreviation
'CC' or 'BK' (the abbreviation for 'beslote korporasie') in
capital letters subjoined to it.
The name must not, in the opinion of the registrar, be
undesirable'. (The Close Corporations Act, however, expressly
provides that there is no duty on the registrar to consider the
question.) Examples of what are considered undesirable are:
- Names identical to or nearly resembling names already
- Names containing descriptive words conveying an
impression of a corporation's business that differs
materially from the corporation's main business;
- Words in a name suggesting vast resources, such as
International' and National', in a close corporation
which only has a small capital;
- Words in a name suggesting blasphemy or indecency or
causing annoyance or offence to any person or class of
- Names suggesting government patronage, whether by the
South African government or a foreign state;
- A name consisting of fewer than three letters of the
It is possible under the Companies Act, 1973, to take a
registrar's decision on a company's name to the Supreme Court,
but this seldom happens. The Close Corporations Act does not
confer such a right (although there may be other, common-law,
remedies), but interested persons can request either the
registrar or the court to order a close corporation to change its
name within one year after the registration of its founding
statement, on the grounds of the undesirability of the name.
Even if the name of a close corporation has been registered,
the registrar can, within a period of one year after
registration, decide that the name is undesirable and order that
it be changed.
On receiving a written objection to a business name to which
the Business Names Act, 1960, applies, the registrar can order
that the name be changed if it is considered likely to deceive or
to mislead the public or to cause annoyance or offence to any
person or class of persons or is suggestive of blasphemy or
Whatever the registrar's decision, the unsuccessful party (the
objector or the business) can apply to the Supreme Court within
60 days to overrule the registrar (see business names).
The use of a name by a close corporation which is similar to
that of another business may amount to passing off', that is, a
representation by someone that his or her business or merchandise
is that of another or is associated with that of another. passing off can be prevented by
obtaining a court order (see interdict).
Counting the cost
Though fees are payable upon the formation of a close
corporation (around R150 in 1996 for registration), it is still
much cheaper to set up a close corporation than a company. Should
a close corporation with a highly complicated founding statement
or association agreement be desired, however, its creation could
become more expensive. On the other hand, an off-the-peg'
(already formed but dormant) close corporation may be acquired
The obligation to keep books of account and to produce
financial statements is also imposed on a close corporation, but
less rigorously and in less detail than in the case of a company.
The requirement that the financial statements of companies be
audited on an annual basis is replaced by the requirement that
financial statements be checked by an accounting officer' whose
duties are less onerous than that of the auditor of a company.
The necessary registers and returns are minimal. There is no
equivalent of the certificate to commence business issued to a
company by the Registrar of Companies, although a certificate of
incorporation must still be obtained by a close corporation.
Formal controls are avoided whenever possible, the minimum notice
period for members' meetings, for example, being simply
reasonable notice' unless the association agreement provides
otherwise. There is no need for an annual general meeting.
There has also been a move towards decriminalisation -
although it has not been possible to scrap all of the provisions
imposing criminal liability, there are fewer of them. There is
recourse to other techniques, such as the imposition of a
penalty, not exceeding a certain sum, on members of a close
corporation for failure to lodge documents with the registrar
(for example, when an amendment to the founding statement of the
corporation is made and has not been lodged timeously with the
Registrar of Close Corporations despite written notice by the
registrar calling for this to be done). A penalty imposed by the
registrar has the effect of a judgment of a civil magistrate's
court (subject, however, to the right of the members concerned to
approach the court with a view to setting aside or reducing the
penalty, or with a view to exempting any one or more of the
members from the duty to pay it).
Also, members may face the forfeiture of the protection
normally afforded to them by the principle of limited liability
in certain cases, for example, when the business of the close
corporation was carried on recklessly, with gross negligence or
with intent to defraud. The members who were knowingly party to
the carrying on of the business in that way may then be held
personally liable for the debts incurred by the close
Furthermore, all notices and other official publications,
bills of exchange, promissory notes, endorsements, cheques,
orders for money, goods or services, letters, delivery notes,
invoices, receipts, or letters of credit emanating from the
corporation must bear the corporation's registered name and
If for any reason a bill of exchange, promissory note, cheque
or order for money, goods or services does not comply with these
requirements and it is not met or paid, then the member or person
who issued it will be liable for the amount due.
The founding statement of a close corporation must contain:
- The full name of the corporation (as well as any
translation and shortened forms of the name); EA
description of the main business to be carried on;
- The date on which the corporation's financial year ends;
- The postal address of the corporation;
- The address of the registered office of the corporation,
which must be a street address and not a box number;
- The name, address and profession of the accounting
officer of the corporation;
- The name, identity number and address of each member;
- The size of each member's interest expressed as a
- The full particulars of each member's contribution to the
Although it is possible for members of close corporations to
make their own arrangements regarding the taking of business
decisions and to incorporate the terms upon which they settle
into an association agreement, it is not obligatory for them to
do so. If there is no association agreement, or one that does not
provide to the contrary, then:
- Every member (except those disqualified in terms of the
Act) may participate in carrying on the business;
- All members have equal rights in proportion to their
interest in managing the corporation's business;
- All are empowered to represent the close corporation in
the conduct of business transactions. Disqualified
- Those under a legal disability, such as lunatics or
prodigals (but not a married woman or a minor over the
age of 18 whose guardian has lodged with the corporation
a written consent to the minor's participation in the
management of the business of the corporation).
- Unrehabilitated insolvents, except those under authority
of an order of court, persons who have been removed from
an office of trust because of misconduct and persons who
have at any time been convicted of an offence involving
dishonesty, including forgeryI, fraudI, perjuryI and
theftI, for which a sentence of imprisonment for at least
six months without the option of a fine has been imposed.
- Any person disqualified from being a director of a
company by an order of court under the Companies Act.
In certain matters, for example, a change in the principal
business carried on by a close corporation, the disposal of the
whole or the greater part of the undertaking of the corporation
and any acquisition or disposal of immoveable property by the
corporation, the written consent of 75 per cent of the members is
required unless the association agreement provides otherwise.
Differences between members are decided by majority vote, with
each member having a number of votes corresponding to his or her
interest in the corporation.
The members of a close corporation, like the shareholders in a
company, can pass a written resolution to wind up the corporation
voluntarily. The corporation may be wound up without intervention
by a court if all the members agree to the passing of such a
resolution and by a court if members holding more than half the
total voting power resolve to have the corporation wound up. In
the latter case, a magistrate's court or a provincial or local
division of the Supreme Court may grant an order winding up the
In addition to this, there are various grounds upon which a
close corporation can be compulsorily wound up by a court. These
- The failure to commence business within a year after
incorporation or the suspension of business for a year;
- The inability of the corporation to pay its debts;
- The presence of circumstances rendering it just and
equitable' that the corporation be wound up.
The corporation will be deemed to be unable to pay its debts
- A creditor to whom the corporation owes R200 or more has
delivered to the registered office of the corporation a
demand requiring the corporation to pay the sum due and
the corporation has for 21 days after that neglected to
pay the sum or to secure or compound for it to the
reasonable satisfaction of the creditor;
- Any process issued to enforce the judgment of a court in
favour of a creditor of the corporation is returned by
the sheriffI of the court with an endorsement that there
is insufficient disposable property to satisfy the
judgment, or that the disposable property found did not
realise enough on a sale
in execution to pay the judgment debt in question;
- It is proved to the satisfaction of the court that the
corporation is unable to pay its debts.
It should also be shown that the winding-up order is to the
benefit of all the creditors. It is unnecessary to prove that the
liabilities of the close corporation exceed its assets in order
to have it wound up on the basis of the inability to pay its
debts; it is enough for a debtor to prove commercial insolvency'
- the mere inability to pay debts as they fall due. When a
winding-up order is granted, the master
of the supreme court appoints a liquidator to take charge of
the close corporation, distribute its assets or, after they have
been realised for cash, pay the proceeds to the creditors of the
corporation and thereafter to the members in the unlikely event
that assets or cash proceeds are left over. After this has been
done, the close corporation may be deregistered, at which point
it will cease to exist.
The registration of the founding statement of a close
corporation may be cancelled if all of the members submit to the
registrar a written statement declaring that the corporation has
ceased to carry on business and has no assets or liabilities, or
if the registrar has reasonable cause to believe that the
corporation is not carrying on business or is not in operation.
In the latter case the registrar must first serve on the
corporation by certified post at its postal address a letter
informing the close corporation that unless written notice is
received within 60 days of receipt of this letter that the
corporation is carrying on business or is in operation, it will
Notice of such deregistration is published in the government gazette.
Notwithstanding deregistration, however, all members and former
members of the corporation will remain liable for the debts
incurred by the close corporation while they were members.
DEREGISTRATION can be reversed and registration restored by
the registrar on application by any interested person if the
corporation at the time of the deregistration was carrying on
business or was in operation, or if it is otherwise just that the
registration be restored.