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Thread: Close Corporation Questions Relating to Member Salaries and Company Vehicles

  1. #11
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    Thanks Clive..

    I have always assumed that my salary was based upon my output and role/job within the CC. From what I can deduce my salary gets withdrawn from my dividends.. Which means I was better off getting a salary from the company and not buying in as a director.

    At the moment, based on my salary and the profit after tax, I would be owing the CC money!!

  2. #12
    Platinum Member sterne.law@gmail.com's Avatar
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    I think Clive has covered the mechanics of salary vs drawings.
    It may be worth your while to try and find the original partners and how they were treated and/or the association agreements.

    There is no logic to the so called calculate profits and then take out 'salary' and then distribute policy. In that case you may be better off 'quitting' and just getting your dividends. If the partners did this, then the company would have to employ people and that would gobble up the so called dividends anyway.

    It sounds to me as if the major shareholder is trying to mislead you or really believes that that is the way it is done, hence my suggestion to try and make some discreet enquiries with the previous shareholders.

    Re the company car (not allowance?). If it is a company car, then it belongs to the company and you own about 2 of the wheels, at least. If it is a car allowance (and the car is in his personal name) then the payment should be dealt with as with salary (get your profits then from that your salary etc, ect)

    This raises a common issue - distinguishing between the equity relationship and the employee relationship, two different issues although often intertwined.

    As I read the initial post, you effectively gave up your salary in that you get 10% of the profit (revenue less expenses). From the profit (your own share) you deduct the 'salary' to get what your profit is. Still the same nett some, just with two differnet names.
    Whereas what should happen, and what you envisaged, I presume, is get salary, then of the profit, calculated as Turnover less expenses less salaries, you would get 10%. Thereby increasing your monthly income.

    The difficulty is how do you resolve the issue given that this is your employment and not merely an investment, hence the need to be more diplomatic and careful in comparision to an outside entity type dispute.

    The delicacies of dispute resolution aside, the issue is contractual in nature, what info was at your disposal, what did you think you agreeing to etc. You mentioned buying in, which would raise the question f valuation and the finaancials used to support that valuation which brings due diligence into the picture. Your post at thi sjuncture, though, seems to be aimed at ascertaining iif your understanding of the calculations is correct/flawed.

    You mention keep cropping up which raises the point of when did this calculation method come to your knowledge?
    Last edited by sterne.law@gmail.com; 03-Dec-13 at 08:16 AM. Reason: further thoughts
    Anthony Sterne

    www.acumenholdings.co.za
    DISCLAIMER The above is merely a comment in discussion form and an open public arena. It does not constitute a legal opinion or professional advice in any manner or form.

  3. #13
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    Well put Anthony.

    The thing is, there is no fixed way to determine the aggregate dividends; they are entirely discretionary and must simply satisfy the solvency test that actually applies to all payments to members, as per Section 51(1), including financial assistance to members. So, any method can be used to arrive at aggregate dividends, or no method at all.

    Section 46 (f) however requires that any payments to members, made to members solely due to their membership (this is important; it therefore covers distributions styled as anything else, including disproportionate fringe benefits!) must be in proportion to their share of members interest.

    The excel example I posted shows how this posted method of payment distorts the share of dividend and as a result it does not comply with the Act.

    As a member you are entitled to have access to all previous financial statements. These must reflect all transactions with members and an analysis of members net investment. So it should be a simple matter to check these calculations and payments for compliance.

    It is of course not a simple matter for a minority partner to resolve it if they don't. Normally I would suggest discussing it in private with the Accounting Officer, who is also tasked with ensuring compliance with the Act, however if he is "cosy" with the other members this can be difficult and in that case I would approach the members directly.

  4. Thanks given for this post:

    Dave A (04-Dec-13)

  5. #14
    Diamond Member wynn's Avatar
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    One of the first things you will need to do and I hope it is not too late, is to isolate yourself from any debts that accrued to the 'cc' before you become/became a member.
    There is nothing more disheartening than being held jointly responsible for the failed lease repayments for the big car of the 'Big Cahuna'
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    Hi Anthony, Thanks for the advise.

    When I bought in there was an issue raised by myself as to how the value of the 10% shares were arrived at. I then questioned the fair value of the company, to which it was explained that it was based upon the value that the previous Partner was bought out at.. I presented a case of the real fair value of the company and we agreed to a fair amount for the 10% shareholding.

    I have reviewed my association agreement and it is not clear on how the dividends get split with regard to the salary (included or not).

    As to when this calculation came to my knowledge.. Well two weeks ago!!

  7. #16
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    Hi Clive,

    I guess all of the above apply, the members are quite cosy with the financial officer and when I have approached the majority member directly it became quite tense..

  8. #17
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    Hi Wynn,

    That's where this whole issue started, I queried why I should sign as surety for the purchase of an expensive vehicle. To which I have excluded myself from..

  9. #18
    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by JohnK View Post
    I have reviewed my association agreement and it is not clear on how the dividends get split with regard to the salary (included or not).
    If it is silent on the inclusion of salaries in the calculation of dividend pay outs, the default position would surely be that salaries are separate from dividends.

    You're still stuck negotiating though - the members would set and agree the salaries of the members, and they do not have to be the same for all members.

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