Closely Held Corporation: Everything You Need to Know
A closely held corporation, also known as a closed corporation, is any company with a limited number of shareholders. While the company's stock may be publicly traded at times, this isn't a regular occurrence.3 min read
A closely held corporation, also known as a closed corporation, is any company with a limited number of shareholders. While the company's stock may be publicly traded at times, this isn't a regular occurrence.
Closely held corporations tend to share the following characteristics:
- They're small corporations with a small number of shareholders.
- They may be either an S corporation or a C corporation.
- State law dictates they limit the number of stock shares.
- In most cases, they're run by family members.
- They often have a more informal business structure, so some decisions don't require approval from the board of directors.
- The shareholders are in control of operating the company.
- The shareholders' agreement outlines how business decisions are made as well as places restrictions on the sale of stock.
About Closely Held Corporations
In the U.S., over 90 percent of all companies are closely held. A closely held corporation differs from many publicly traded firms, where the ownership is widely disbursed and professional managers often run the business.
In a closely held business, ownership may include traditional investors, but it may also involve family members. Many large, publicly traded businesses are controlled by families.
Families keep their hold on the business by doing the following:
- Holding seats on the board
- Holding positions in senior management
- Having preferential voting privileges
Family members may remain dominant with these actions, although their shareholdings may be less than 50 percent. To qualify as a closely held corporation, people outside of the company must hold a minimum number of shares, such as members of the public at large.
By definition, a closely held corporation is a private corporation, but not all private corporations are closely held. They're different from privately owned companies that may issue stock but aren't publicly traded. Many closely held corporations are on the small side, but some are rather large.
If a shareholder in a closely held corporation wishes to sell his or her shares, one of the other shareholders must purchase them because public sales of shares aren't allowed. Many transactions between a closely held corporation and major shareholders don't get the type of special tax treatment that a corporation with actively traded stocks receives. For parties in these transactions, losses and deductions might not be allowed in some cases.
Individuals with shares in closely held corporations should consider consulting a financial planner who's experienced in the tax and estate ramifications associated with this type of stock.
A closely held corporation doesn't have to publicly disclose its financial information. It can also keep its records private because the Securities and Exchange Commission doesn't regulate it.
Usually, a small number of shareholders controls a closely held company, and these shareholders hold the majority of shares. Shareholders tend to maintain their investments over a long period of time, so new investors have little opportunity to obtain a large enough stake in the business to become a controlling member. Typically, only minority stakes are available for trade.
Because majority shareholders usually hold onto their shares for the long term, it's hard for outside entities or corporations to attempt a hostile takeover. This gives the company a sense of stability since business decisions are made solely to serve the business.
In addition, share prices in closely held corporations are often more stable because shares are rarely traded on the open market. Irrational market activity has little influence on stock prices in a closely held company. While this may make it harder to raise capital through the sale of stock shares, it also keeps the business from being subject to the whims of unpredictable investors.
These corporations may choose to raise capital through other means, such as by private funders — or venture capitalists — who buy shares in exchange for an infusion of funds. Closely held companies may also raise capital using their own operations.
While it may seem that most corporations are large, sprawling enterprises, the opposite is actually true. Many corporations are small companies largely controlled by family members. In most of these instances, the controlling parties have the best interests of the corporation in mind.
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