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Thread: Members loan accounts

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    Members loan accounts

    Hi, can you please advise. I am selling shares in my CC to staff members. They need to pay me an amount each month. They are wanting to pay me out of the profits of the business. My accountant disagree with this so they want a second opinion. Surely if I were to give them money out of the profits of the business, they would need to pay tax on that money. what is the correct way to do this. My understanding is that they cannot have a debit balance loan account. Thanks, Maureen

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    Platinum Member desA's Avatar
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    Paying out of the profits could take a long time & is surely not a certainty. What if there are NO profits?

    I would also suggest having a solid contract drawn up in order to protect all parties, if something goes wrong during the buy-out process. Who owns what, after paying what? Anything can!!!
    In search of South African Technology Nuggets(R), for sale & trading in South East Asia.

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    Employee share incentive schemes in close corporations generally don't work. Some of the main reasons are

    1. The maximum number of members in a cc is 10
    2. Shareholding and management are inseparable. Every shareholder is also a director.
    3. Changing anything is cumbersome and sometimes daunting.

    In principle, the purchase price can be paid from profits; the purchasers cede their future dividends to the seller. However, as Des pointed out, what if there are no profits?

    Far better (and if the size warrants it) is to convert to a company with two classes of shares; ordinary shares with voting rights and another class without voting rights, or at least limited rights.

    The down side would be the audit requirement (the company would not be defined as owner managed) would inevitably cost an arm and a leg.

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    Quote Originally Posted by desA View Post
    Paying out of the profits could take a long time & is surely not a certainty. What if there are NO profits?

    I would also suggest having a solid contract drawn up in order to protect all parties, if something goes wrong during the buy-out process. Who owns what, after paying what? Anything can!!!

    thanks for the replies, we do have a contract in place. and there are usually profits, so that should not be a problem (unless something drastic happens). Also, they don't have to take all the profits out, only enough to pay me. But I am concerned more about the tax implication on that withdrawal.

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    Quote Originally Posted by maureen@global.co.za View Post
    Also, they don't have to take all the profits out, only enough to pay me. But I am concerned more about the tax implication on that withdrawal.
    If in the form of dividend, the cc withholds 15% dividend tax.

    If extracted as remuneration, paye has to be deducted at normal rates.

    In your case, it is capital gains you need to consider.

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    The CC may give financial assistance to any member acquiring an interest. Refer section 40 of the CC Act:




    "A corporation may give financial assistance (whether directly or indirectly and whether by means of a loan, guarantee, the provision of security or otherwise) for the purpose of, or in connection with, any acquisition of a member's interest in that corporation by any person, only-

    a)with the previously obtained written consent of every member of the corporation for the specific assistance;

    b)if, after such assistance is given, the corporation's assets, fairly valued, exceed all its liabilities;

    c)if the corporation is able to pay its debts as they become due in the ordinary course of its business; and

    d)if such assistance will in the particular circumstances not in fact render the corporation unable to pay its debts as they become due in the ordinary course of its business."

    Keep in mind that a CC may only have a maximum of 10 members and there are further restrictions on persons who may and may not be members of a CC (refer section 29). But if they cannot afford to buy in, why take the risk of lending them money out of profits to buy in? What if things don't work out and profits aren't that great?

    Consider carefully.

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    Thanks I agree with you.

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