Definition
A Close Corporation, also referred to as a Closely Held Corporation, is a type of corporation characterized by a limited number of shareholders who typically participate more actively in the management of the business. These corporations are not publicly traded and often enjoy fewer regulatory requirements compared to large, publicly held corporations. Close corporations usually have a shareholder agreement that restricts the transfer of shares, ensuring that control remains within a small group.
Examples of Close Corporations
- Family-Owned Businesses: Many family-owned businesses operate as close corporations, allowing family members to maintain control and participate in the management.
- Professional Practices: Law firms, medical practices, and accounting firms often use the close corporation structure to keep ownership and control within a select group of professionals.
- Start-Ups: Start-up companies often begin as close corporations to facilitate decision-making among a small group of founders and early investors.
Frequently Asked Questions
What are the main advantages of a close corporation?
- Control: The small number of shareholders allows for tighter control by the owners.
- Flexibility: Close corporations can operate with fewer formalities, such as not having to hold annual meetings.
- Privacy: These corporations are not required to disclose financial information publicly, maintaining privacy.
Are close corporations regulated differently than publicly held corporations?
Yes, close corporations are subject to fewer regulations and reporting requirements than publicly held corporations, which are closely monitored by security regulators.
Can the shares of a close corporation be transferred freely?
Typically, no. Shareholder agreements often restrict the transfer of shares to maintain control within the small group of current shareholders.
What is the legal basis for close corporations in the United States?
Close corporations are recognized under specific state statutes, which provide the framework and regulations for their formation and operation. Each state may have different laws governing close corporations.
Related Terms
- Public Corporation: A corporation whose shares are publicly traded and subject to stringent regulations and reporting requirements.
- Shareholder Agreement: A document that outlines the rights and obligations of shareholders and can include restrictions on the transfer of shares.
- S Corporation: A type of corporation that meets specific Internal Revenue Code requirements, offering tax benefits and avoiding double taxation.
- Limited Liability Company (LLC): A hybrid business entity offering limited liability to its owners and fewer regulatory requirements.
Online References
Suggested Books for Further Studies
- “Corporations and Other Business Associations: Cases and Materials” by Charles R.T. O’Kelley and Robert B. Thompson
- “Understanding Close Corporations” by Arthur M. Schlesinger
- “Corporate Governance: Principles, Policies, and Practices” by R. I. (Bob) Tricker
Fundamentals of Close Corporations: Business Law Basics Quiz
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