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Revealed: Laws governing an association agreement

by , 24 February 2014
Are you a member of a Close Corporation (CC)? If so, continue reading to find out the laws governing an association agreement.

Before we get to the laws that govern an association agreement, let's define what an association agreement is.

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The Practical Tax Loose Leaf Service defines an association agreement as the voluntary election to use an agreement where there is more than one member. Its aim is to regulate the internal affairs of the CC and is binding on all present and new members of that CC.

Why use an association agreement?

Well, a CC has no board of directors and no division of powers exists between you and other members. You share equal powers with other members.

The best way to define the powers within your CC and the authority and duty of each member is to set up an association agreement.

The agreement will also help you regulate issues like:

  • The use of proxy votes and the voting procedures at meetings
  • Participation of members in the management of the CC
  • Settlement of members' disputes
  • Repayment of members' contributions
  • Sale and transfers of members' interests
  • Borrowing powers
  • Treatment of members' interests when a member dies.

It's for these reasons that an association agreement must be legal compliant.

Make sure your association agreement is in line with these laws

The Loose Leaf Service explains that the main restriction governing your association agreement is that it should not contradict the Close Corporations Act or any other governing act, including the Income Tax Act.

One of the fundamental elements of an agreement is that it should be lawful and should not require any party to the agreement to commit any unlawful action.

This means, if your agreement stipulates something that's prohibited by the Close Corporations Act (or any other legislation), that stipulation won't be valid.

Note: In most cases it's not the entire agreement that will be invalid, but only the terms that are contradictory to the legislation. The best thing you can do is to ensure your association agreement is in line with the relevant laws.

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