In recent years it has been all the rage to ring fence small business affairs to protect them from the ravages of creditors wanting what is owed to them. This is considered good business practice, and it embraces the spirit of “limited liability company” most effectively. Used carefully it may have even helped protect business owners who traded in insolvent circumstances – criminally.
A few things have changed in recent years:
- The new Companies Act 71 of 2008
- Capital Gains Tax (CGT) rates for companies
The first has effectively taken out the six month rule with regard to reversing transactions, and the criminality of trading in insolvent circumstances. Creditors have the power now to go after business owners in their personal capacities, piercing corporate veils if they can be shown to have traded recklessly. Very much motivated, creditors no longer need to rely on criminal prosecutions from an overburdened prosecuting authority. I suspect that some really gatvol creditors will prosecute civilly beyond the economically viable!
More to the point though, as I assume my readers do not trade in insolvent circumstances (ever!) is the change to CGT rates for companies. In 2012 the effective rate on CGT for companies was hiked by an amazing 33%.
The method of choice until recently (and I have preached it far and wide) is to sell the business out of the company, and distribute the funds which are paid, from there. But with the new tax rates, this means getting those funds out has increased by a whopping 40% and some change.
The reason for the asset deal instead of the equity deal (sale of shares) is one of future security for the seller. He remains protected by his limited liability vehicle until it is safe to liquidate it. That may take some years, or at least until any possible claims have prescribed. It is the safe, but now expensive, way of doing things. Much cheaper from a CGT perspective is to go the sale of shares route. But this takes time and planning.
Some more upside: Making the necessary changes to the way things are done will add to the value of your business.
Pure brilliance – and good reading too!
Hi Mark,
I received your email above, via my brother Russell in CT recently.
Please would you forward to me your kind free offer of how to “Prepare Your Business For Sale” tutorship.
As well as making the necessary changes to the way things are done, that will add to the value of my business.
Many thanks Ed
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Ed, if you go to http://www.prepareyourbusinessforsale.co.za there is a link on that site to register for the course.