Member loan accounts CC's

[Ezanne]

Are retained earnings and member loan accounts linked?

IE. will retained earnings at the end of the financial year reduce the balance of the loan account?

Also if a member wishes to sell his interest in the CC, would it be correct to assume that this loan account needs to be settled first?

The above questions is based on my mother inheriting my Dad's interest in 2 CC's after his passing and is looking at selling her ïnterest" to the other partner.
I also therefor need to know what to be on the lookout for when asking for a detailed analysis of the loan account and what is allowed to be in there or not, what would possibly overinflate the value, and what should decrease the value seeing as their is no trust in the current bookkeeper to have been honest, open and precise with the recording of all recent transactions

[Blurock]

Welcome to TFSA Ezanne.

A loan account is money that a shareholder has put into the business. This can either be an interest free loan or interest bearing. The loan account may also be negative if the owner has borrowed from the business.

Retained earnings is essentially accumulated profits that is not paid to the owners, but retained in the business as a reserve. If your dad had say a 40% interest (share) in the business, he would be entitled to a 40% share of the retained earnings. This needs to be calculated up to the date that he ceased to be a member.

If the partners/shareholders/members had a buy and sell agreement, the payout will be determined by this agreement. Usually this agreement is linked to an insurance policy which is paid out upon the death of one of the parties.

There may also be some goodwill in the business. Does it own any brands, contracts or other intangibles that can be worth anything? What about assets such as stock, vehicles, equipment, machinery etc. There are different ways of valuing a business and by not having a buy and sell agreement in place, can lead to much confusion and unnecessary arguments.

I suggest you also discuss this with the executor of your father's estate or get some professional advice to ensure that all is done fairly.

[geraldenek]

I also therefor need to know what to be on the lookout for when asking for a detailed analysis of the loan account and what is allowed to be in there or not, what would possibly overinflate the value, and what should decrease the value

There are so many things that can be posted against the members loan account - but i would say a safe bet if you want to double check everything - if you get the ledger for his loan account and there is for instance R10,000 paid to him, you can always correspond this with your fathers bank statements.

It just depends on the enteries on the ledger as some members take money for their private bills for example - but you will be able to trace most of the transactions.

Cash paid to him would be a bit difficult if their is not a signed receipt by your father.

[Ezanne]

Thank you so much for the advise.

Basically the company has been valued by external bookkeepers including goodwill and the rest, but the partner is trying to deduct the expenses of the loan account against the price that has been agreed upon. I have asked my mom to request the financial statements so we can see what kind of retained earning there is, also a detailed ledger of the loan account expenses and then a breakdown of how the accountant has come to the "price"that has been put on the business

There is no buy or sell agreement unfortunately, so yes things are quite a bit more complicated

[CLIVE-TRIANGLE]

Ezanne, it sounds like there is an association agreement in place. Do you know if that is the case? Typically, the member has claim to:
a share of retained income, based on his or her contribution as a percent of the total contribution, plus
the balance of his / her loan account, plus
a share of the current profit, plus
a share of the goodwill (if any), as above

Normally the association agreement will quite specific about this and especially what and how if a member passes away.

If there is no association agreement, then the act determines the course:
S35..
Subject to any other arrangement in an association agreement, an executor of the estate of a member of a corporation who is deceased shall, in the performance of his duties-

a) cause the deceased member's interest in the corporation to be transferred to a person who qualifies for membership of a corporation in terms of section 29 and is entitled thereto as legatee or heir or under a redistribution agreement, if the remaining member or members of the corporation (if any) consent to the transfer of the member's interest to such person; or

b) if any consent referred to in paragraph (a) is not given within 28 days after it was requested by the executor, sell the deceased member's interest-

i) to the corporation, if there is any other member or members than the deceased member;

ii) to any other remaining member or members of the corporation in proportion to the interests of those members in the corporation or as they may otherwise agree upon; or

iii) to any other person who qualifies for membership of a corporation in terms of section 29, in which case the provisions of subsection (2) of section 34 shall mutatis mutandis apply in respect of any such sale.