PURCHASING VIA LEGAL ENTITIES - PRO'S & CON'S

COMPANY

ADVANTAGES

CC, Trust, company can be shareholders
Strictly controlled by legislation (Companies Act no 61 of 1973)
Can have up to 50 members (private company) which in turn could help raise finance.

DISADVANTAGES

The costs of annual audit


CLOSE CORPORATION

ADVANTAGES

Inter vivos trusts and natural persons can be member
May provide financial assistance for purchase of member’s interests
Transfer of member’s interest not subject to stamp duty / single securities tax
Simplified management, no audit required
Formed easily and inexpensively

DISADVANTAGES

Membership limited to 10. If a trust is a member, the number of beneficiaries on the trust, plus the individual members may not be more than 10
Unique to SA, not readily recognised internationally
May be phased out in future


TRUST

ADVANTAGES

The trust is treated as a body separate from the individuals.
Requirements for registration relatively simple
Good estate planning device
Assets don’t form part of the insolvent estate in the event of sequestration
Strict controls – Trustees accountable to Master of the High Court
May protect property owner against creditors as long as the trust property is not offered as security against a loan.
Special trusts will be allowed CGT exemption if primary residence (& meets other requirements to qualify)
Special trusts- taxed at individual rates
Trust deed can be set up so as to determine the manner in which Trustee administers the fixed property and the Trustee is duty-bound to obey these wishes
Perpetuity – the trust ordinarily continues to exist as an entity, despite the death of the founder, a trustee or beneficiary

DISADVANTAGES

Not acknowledged as a separate legal entity or juristic person
Cannot be sold as an entity
The beneficiaries normally have discretionary rights which are not assets that can be sold like shares

APPLICABLE TO ALL ENTITIES

ADVANTAGES

Separate legal personality (CC’s and Companies)
If shares held in trust, may protect the shares as long as not offered as security against a loan.
May be able to write off costs such as upkeep & maintenance on property against tax (legal entities and individuals)
Shares / members interests can be sold
Continues to exist as an entity even in event of death or resignation of members/shareholder/director/trustee


DISADVANTAGES

Capital gains tax – no exemption, even if property held in Company/CC or Trust (inter vivos), is primary residence.
w.e.f 1/10/07: Dividend Tax (CC’s and Companies) 10% on all distributions (broadened base)
Registration and administration costs (CC’s and companies)
Transfer duty is 8% (CC’s, Companies, Trusts)
Lending instructions will usually require a suretyship.