Are you a shareholder in a private company or a member of a closed corporation? Read on for a brief overview of what to do if a shareholder of a private company or member of a closed corporation passes away.
1. Shareholding in a private company
While shares in a company listed on a stock exchange can be valued and transferred/sold quite easily, it can be much more complicated when the shares are held in a private company.
A company consists of directors and shareholders – and in some cases the shareholder is a director. The deceased person needs to be replaced as soon as possible after the Letter of Executorship has been received. This is to mitigate the risk of doing business, especially where the deceased was a director with decision-making and signing powers.
The Memorandum of Incorporation, Articles of Association, Statutes and Shareholders’ Agreement of the entity will determine the process that needs to be followed regarding the appointment of a new director and how shares need to be dealt with.
Assuming the estate is not insolvent, shares can be transferred to heirs, or anyone else entitled to them. For the purposes of risk mitigation, this should happen as soon as possible.
2. Member’s interest in a Close Corporation
A Close Corporation is a business entity where each member owns a percentage of the business. This is in contrast to a company which has shareholders & directors .It is an old concept that is no longer in use: new Close Corporations cannot be registered but are still acknowledged or converted to companies.
The inheritance processes for shareholdings in private companies and member’s interests in Close Corporations are identical:
If shares/member’s interests are inherited by the surviving spouse
A copy of the latest financial statements together with a valuation of the shares/CC must be obtained from the accountant/auditor of the entity. The accountant/ auditor will also confirm if there were any loans due to or by the deceased person. This will then either show as a claim in favour of the estate or a liability against the estate.
The value provided by the accountant/auditor is then used for estate purposes and the drafting of the Liquidation and Distribution account.
If shares/member’s interests are inherited by someone other than a surviving spouse
Again, the accountant or auditor will provide the executor with the valuation of the shares/CC held by the deceased person. This together with a set of financials (from as close to date of death as possible) and financial statements for the two preceding years must then be submitted to SARS for approval of the valuation as provided by the accountant/auditor.
If there are assets registered in the name of the company/CC, SARS will also require updated valuations of these assets. The executor then needs to await approval from SARS before proceeding.
Why are there different rules for surviving spouses and other heirs?
There are two very good reasons for this distinction:
- In terms of current legislation, any assets inherited by a surviving spouse do not attract estate duty. This means that the taxman doesn’t need to concern himself with the value of the shares/member’s interest.
- Capital Gains Tax is not payable if an asset (even one which would usually attract capital gains tax) is bequeathed/inherited by a surviving spouse. Instead, Capital Gains Tax is deferred until the spouse disposes of the shares. Please bear in mind, however, that the base cost used in the CGT calculations is the base cost of the predeceased spouse. Please also note that this deferment is also only applicable to a surviving spouse who is a South African resident for tax purposes.
The methods outlined above are not the only way of disposing of shares in private companies or member’s interests in Close Corporations. If a business is owned by two or more partners, there can sometimes be a Buy-and-Sell Agreement in place between the partners. Such agreements are often made to avoid family members/heirs receiving shares/member’s interests in operations that they do not understand.
Buy-and-Sell Agreements are usually underpinned by life policies on each partner. If a partner dies, their policy pays out to the remaining partners to enable them to purchase the shares/member’s interest in the business. In order for the life policy not to attract estate duty, there are certain formalities required including the drafting of a Buy-and-Sell agreement between the shareholders/members.
The bottom line
If you are a shareholder in a private company or have an interest in a Close Corporation, it’s vital to ensure that the administration of these entities is kept up to date. It’s also a good idea to discuss your involvement in the entity with your estate planner/Wills drafter at your next estate review. This will help to avoid unnecessary delays in the administration process of your estate.
Sentinel International has decades of experience in complex legacy planning. Please feel free to contact us if you have any questions about your situation.
Written by Erna De Villiers