Disadvantages of a Close Corporation

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 Close Corporation will be very important when deciding what form of ownership will be best for your business.

Disadvantages of a Registering a Close Corporation:


1.    The Close Corporation Act of 1985 restricts the number of members of a CC to a maximum of 10, which limits the expansion of the establishment.

2.    Members of a Close Corporation 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, banks or other financial institutions might require the financial documents of the CC to be audited. Financial aid will be considered only after the Close Corporation 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 Close Corporation, the CC is bound by its member’s actions, introducing a potential risk to the business entity!

6.    A Close Corporation cannot be sold to a company simply because a Company cannot be a member of a Close Corporation.

7.    If a Company wants to take ownership of a Close Corporation, the CC first needs to be converted into a company.

8.    A CC cannot become part of a group structure, meaning that a Close Corporation cannot become a member of a Company or another Close Corporation.

9.    Major decisions concerning the Close Corporation 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 Close Corporation 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 before deciding on what form of business to establish.