VENTURES: The Days Of cc's Numbered
Recent Western Cape Business News
WITH the worst of the recession seemingly behind us, many South Africans are considering starting new businesses. There are a variety of reasons for this, ranging from retrenchment to bargain spotting, but regardless of the reason, the importance of getting the structure right from the beginning cannot be underestimated.
So says David Warneke, a tax partner at Cape Town-based Cameron and Prentice Chartered Accountants.
History shows that for the budding entrepreneur, and or partners, the most popular choices are usually a close corporation (cc) or a company.
“Once the new Companies Act comes into force, which will probably be later this year, close corporations will not be entirely phased out: existing close corporations will remain. However, it will not be possible to form a new close corporation.”
“The idea behind close corporations when they were first introduced in 1984 was to establish a more flexible and cost-effective vehicle for smaller businesses,” explains Warneke. “The new Companies Act looks set to achieve these same goals for smaller companies, especially in the case where the shareholders of a company are also all directors.”
Warneke advises that in the case of such an entity, a company will become the vehicle of choice in the future.
“From the point of view of taxation, there is practically no difference between the treatment of close corporations and companies. In fact the definition of ‘company’ in the Income Tax Act includes a close corporation.”
“Where the turnover of the company is under R14 million per annum and various other requirements are met, the company will qualify as a ‘small business corporation’, benefiting from lower income tax rates and concessions on capital allowances.”
One question that many may ask is why it is necessary to incorporate a smaller business undertaking at all? Why could such an enterprise not be conducted as a sole proprietorship or a partnership?
According to Warneke, the main reason is limitation of liability. “By incorporating, a separation is achieved between the investor’s private assets and those of the business vehicle. Therefore, unless the directors or members trade recklessly or contravene other provisions of the Close Corporations Act or the Companies Act, their personal assets will not be open to attack by virtue of the activities of the business.”
Warneke further explains that various problems associated with partnership law in South Africa make partnerships an unattractive choice. “One of these problems is that each time a partner enters the partnership or a partner retires, from a legal perspective the partnership comes to an end. Amongst other issues, this creates uncertainty from the perspective of taxation.”
“One should also note that the tax advantages of a ‘small business corporation’ as referred to above, are not available to sole proprietorships or partnerships.”
“If one is taking over an existing concern, it is generally sound advice to purchase the assets out of the existing close corporation or company rather than to purchase the members’ interests. The most important reason is that there may be undisclosed creditors lurking in the entity. A further reason is that if one finances the purchase of the assets, one could get a tax deduction for the interest on productive assets but not for the purchase of the members’ interests,” says Warneke.
“Starting or buying an existing business is often a difficult decision, fraught with many worries, uncertainties as well as excitement and expectations. Registering the entity under the best structure is the first, most vital decision to make to ensure the future success of the business. If a person is uncertain of the parameters or requirements then they should seek the advice of a business strategist or their accountant,” concludes Warneke.
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