Companies vs Close Corporations

Companies vs. Close Corporations
If you go the corporate route, you will need to consider the differences between a company and close corporation.  

Relevant advantages and disadvantages: 
Companies are more expensive to run and they require annual audited financial statements.  Companies can be problematic because of Section 38 of the Companies Act, which prohibits a company from giving financial assistance to purchase its own shares. You can therefore experience problems with the registration of a mortgage bond to buy the property belonging to the company. You can, however, get financial assistance to buy the loan accounts of the company, so if the loan account is bigger than the bond you intend taking out, you will not contravene this provision of the Companies Act.  Close corporations are less costly to run - they do not require annual financial statements.  Close corporations can only be owned by ordinary people; your close corporation cannot form part of any pyramid structure created for estate planning, or other purposes.

Personal Taxation: 
You will need to bear in mind your own tax position. If you are buying and selling property regularly, you may find yourself taxed on profits. By holding your properties in legal entities or trusts, you reduce this possibility.  

Financial Security: 
A close corporation or company will not protect your property from your insolvency and will not avoid estate duty in a deceased estate. Only a trust can do that for you (or for your beneficiaries or heirs).
Estate duty is currently 20% of the value of your estate over R2 5000 000 and is expected to increase. Any method of excluding assets from your estate as early as possible, so as to allow for the capital appreciation to take place out of your hands, is to the tax advantage of your estate and to the benefit of those you leave behind. 

So why are trusts not necessarily the solution?
Firstly, the practice of selling the 'beneficial interest' in trusts in order to avoid the payment of transfer duty is widespread but it is by no means absolutely certain that in South African law you can 'sell a trust'. A possible problem flowing from such a transaction in that the sale of the equity in a trust may be a receipt of a capital nature and could result in an income tax liability in the hands of the trustees and / or beneficiaries. There is also the risk of a donations tax implication to the beneficiaries in respect of the waiver of their right where they receive no consideration. These are, however, complicated legal issues as yet untested by our courts.
Secondly there is a possibility that the South Africa Revenue Service will attack the transaction and claim transfer duty (as well as penalties) from the Purchaser who is attempting to avoid paying transfer duty. The South African Revenue Service has clearly stated that the acquisition of the beneficial rights in a trust constitute a 'transaction' as defined in the Transfer Duty Act, Act No 40 of 1949 (as amended), and as such is subject to Transfer Duty.
Thirdly, trusts are under scrutiny and the laws may well change to allow for taxation to be levied on the trust assets. You may then find yourself unable to extricate yourself from a disadvantageous position, unless you are prepared to do so at considerable cost.

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