Closed Corporation: Everything You Need to Know

What is a closed corporation? A smaller company can elect to have close corporation status which then allows it to operate without many of the same strict formalities that exist with standard corporations. 3 min read

Closed Corporation

What is a closed corporation? A smaller company can elect to have close corporation status which then allows it to operate without many of the same strict formalities that exist with standard corporations. Other names by which close corporations may be called are: privately held company, family corporation, private company, and incorporated partnership.

Some key points regarding a close corporation include:

• Shares are owned by a small, select group of people.
• The shareholders generally have a strong involvement with the business.
• The nature of the shareholders and directors relationship with the business allows the company to function more as a partnership.

What it Takes to be a Close Corporation

Obviously, to be exempt from some of the formalities and restrictions placed on standard corporations, there are certain requirements that must be met to be eligible for close corporation status. Some of these include:

• In most states, a close corporation can only have between 30-35 shareholders
• Shares or stocks cannot be [publically traded].(http://www.investorwords.com/3940/publicly_traded.html)
• Generally, the unanimous agreement of shareholders for close corporation status is needed.
• A written shareholder agreement, spelling out the specifics of the close corporation status must be drafted.

Advantages of a Close Corporation

There are certainly some advantages to having status as a close corporation. Among some of these advantages are:

• Shareholders have a lot of control over how and when they sell shares to outside investors; shareholders do not have to adhere to same level of oversight from the board of directors as standard corporations.
• As they are not bound by many of the same reporting requirements, it allows for greater operational freedom and flexibility.
• Shareholders can benefit from strong liability protection.

Disadvantages to a Close Corporation

While some of the advantages to a close corporation are certainly appealing, it is not all rainbows and sunshine. There are some disadvantages that you will want to keep in mind, before you commit to close corporation status. Some of these disadvantages may include:

• Close corporations do not exist in all states. With that said, since you are able to potentially incorporate in any state, you do have the option of establishing your business in a state that does allow for close corporations. You will just want to ensure that you and your business advisors are up to speed on the governing laws of the state in which you are incorporating your business.
• A close corporation often costs more money to organize.
• While shareholders have the benefit of greater control over the sale of shares, shareholders in a close corporation are also burdened with increased responsibility.
• A close corporation has to be governed by both a shareholders agreement and the company bylaws. In turn, this creates a more complicated set of rules by which the company is governed.
• A close corporation cannot publically sell stocks, which can affect the overall value of the company, as well as cash flow.
• The resale value of a close corporation is often not as great as it would be with a standard corporation.

If you are leaning strongly towards obtaining close corporation status for your business, these are states in which you can file your corporate charter or articles of incorporation:

• Alabama
• Arizona
• Delaware
• Georgia
• Illinois
• Kansas
• Maryland
• Pennsylvania
• Montana
• Nevada
• Missouri
• South Carolina
• Texas
• Wyoming
• Vermont

Close Corporation vs. General or Traditional Corporation

You may still be questioning which is the best course of action for you and your business. Some key points to consider, if you are thinking about going the route of a traditional corporation are:

• State laws often require bylaws to be drafted for a traditional corporation that stipulates that annual shareholder meetings be held. It is during these annual meetings that a board of directors is elected.
• While the shareholders may only be required to meet yearly, the board of directors is generally expected to meet more regularly, often quarterly or monthly. The board members then elect corporate officers, such as president, vice president, secretary, treasurer, etc. They then often are responsible for overseeing the daily operations of the company.
• Thorough minutes are required to be taken at both shareholder meetings and meetings of the board of directors, as these minutes are often required to be submitted, annually, to the secretary of state for the state in which the company is incorporated.

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