Cape Town - The government is closing the door for 1.6 million close corporations which were first set up in the apartheid era to allow smaller entities - including small family businesses - to start up and run more easily without the bureaucratic red tape associated with proprietary limited firms.
However, the state wants to close opportunities for misuse of the close corporation system, while establishing a new system that will allow business to flourish.
For example, existing proprietary firms have to meet high auditing standards.
While the extent of abuse - such as tax avoidance - is not clear among close corporations, Nikki Viljoen of N Viljoen Consultants - which assists small businesses - has welcomed the news that it would be easier for private firms to be set up in their stead.
The problem with close corporations, she argued, was that they were not required to be audited and there was no certainty their accounts were adequately managed.
Many close corporations had been used in the past by the property industry to avoid transfer tax on properties.
Trade and industry minister Mandisi Mpahlwa is piloting through a Companies Bill which, when enacted, will see the end of new close corporation incorporations.
However, it is envisaged that existing close corporations will be allowed to continue to operate for 10 years.
The legal advantages of close corporations have recently begun to ebb.
In January, the Cape high court ruled that members and officers of a close corporation could be held liable for a corporation's debts.
Until then, close corporations could be set up to ensure that members were not liable for the corporation's debts.
Bill Lacey from the South African Chamber of Commerce said there would be a measure of uncertainty created by the ending of close corporations
A spokesperson for the South African Institute of Chartered Accountants (Saica) welcomed the steps taken in the new Companies Bill.
Saica's senior executive of standards, Ewald Muller, said the bill was good news.
While it was "an irritation in a sense" that close corporations would have to convert over time to private companies, he said his understanding was that the new form of a private company would not have to conform to International Financial Reporting Standards.
Viljoen said that previously there had been a problem with people opening and shutting their close corporations when they landed in trouble with creditors.
Pressed on whether the phasing out of close corporations would place a burden on small businesses in particular - having to convert to a new company - she said this would be no worse than getting a new identity document.
The trade and industry department's chief director of policy and legislation, Fungai Sibanda, said "a new regime" was being introduced for the categorisation of companies, including existing private companies, public companies as well as close corporations.
- The sole trader or proprietor. There is only one owner of the business. Its major advantage is that it is the least expensive and the least complicated to set up. It is not legally obliged to produce financial statements. The biggest disadvantage is that the law does not distinguish between the assets that belong to the business owner and those of the business. This applies to debt held by the owner and company. The owner's personal assets can be attached to repay debts the firm owes to financiers and suppliers.
- A partnership between a minimum of two and up to 20 partners, who own the business together. The law does not recognise a difference between the partnership's assets and debts and those of the partners themselves. Financial statements are not a legal requirement, but are essential to establish how the profit will be divided. Once one of the partners leaves, a new partnership must be formed.
- The close corporation takes care of some of the problems presented by the sole proprietor and partnership. Its popularity arises from the fact that it is not as complicated to set up as a firm, and the assets and debts of the business belong to the corporation, offering a level of protection to its owners. The assets and liabilities of the members are not conflated with the corporation. Unless a member of the corporation has personally signed surety for a loan, he or she is not held liable for the firm's debts. Corporations are legally obliged to keep financial records but are not required to have them audited. They have to pay tax on earnings and dividends .
- The last business entity, known as a company, is regulated by the Companies Act. It is regarded as separate from shareholders and directors. It is more expensive to set up and run, and must comply with stringent accounting policies. Financial statements have to be audited.