Key Takeaways

  • A statutory close corporation is a special type of closely held corporation with 50 or fewer shareholders that is exempt from many traditional corporate formalities.
  • Shareholders often manage the business directly, eliminating the need for a board of directors and formal bylaws.
  • This structure provides liability protection like a standard corporation while allowing operational flexibility similar to a partnership or LLC.
  • Statutory close corporations are ideal for family-owned businesses, small companies, and startups seeking control retention and simplified governance.
  • There are specific formation and compliance requirements, including inclusion of a statutory election in the Articles of Incorporation and adherence to shareholder agreements.

What is a statutory close corporation? Basically, a statutory close corporation is an election that corporations can choose in their Articles of Incorporation. These corporations will have 50 shareholders or less and must meet several other requirements.

Explanation of Statutory Close Corporations

In the South Carolina Statutory Close Corporation Supplement, the requirements for following corporate formalities have been relaxed. In addition, some corporate formalities have been completely or partially eliminated. A corporation can become a statutory close corporation by adding a statement to its Articles of Corporation indicating this election.

In most circumstances, the shareholders of a close corporation have a hands-on role in operating the company. If a corporation has fewer than 50 shareholders, it can make the special statutory close corporation election. Statutory close corporations are controlled by a state law written for this specific purpose.

For this election to be valid, the statutory close corporation must comply with the rules of the statute, including using the correct language in the Articles of Incorporation. If a corporation is owned by a small number of shareholders, it is considered closely held.

South Carolina corporations with a single shareholder or more can make the statutory close corporation election. Under the Supplement, statutory close corporations that do not follow typical corporate formalities will not expose their shareholders to personal liability.

Depending on the state, traditional corporations may be able to transition into a statutory close corporation. Essentially, electing statutory close corporation status means the corporation can be operated almost identically to a limited liability company (LLC).

The term close corporation is used generically for corporations that do not trade their stock on a public exchange. It's important to understand that just because a company is designated a close corporation, it doesn't mean that it is also a statutory close corporation.

A statutory close corporation only exists if the state allows for this election and the Articles of Organization includes special language. The benefit of electing statutory close corporation status is not having to strictly adhere to corporate formalities. These corporations, for instance, can include a statement in the Articles of Organization that allows the corporation to operate without appointing a board of directors.

Instead of corporate decisions being made by the board of directors, the shareholders can choose to operate the corporation like a partnership. As long as the agreement is in writing, the shareholders of a statutory close corporation can operate the company however they see fit. Unlike normal corporations, statutory close corporations are not required to have company bylaws. Instead, these corporations can include legally required bylaw provisions in their Articles of Incorporations.

Required provisions include:

  • The location and time of shareholders meetings.
  • The number of corporate directors.
  • When directors need to be notified of meetings.
  • Authority of corporate officers and how officers are elected.

Advantages of a Statutory Close Corporation

One of the main reasons small businesses elect to become a statutory close corporation is the balance it offers between liability protection and management flexibility. Because these entities are exempt from many of the formalities imposed on traditional corporations, they are easier and less expensive to operate while still providing significant legal benefits.

Key advantages include:

  • Simplified Management: Shareholders can directly manage the company’s operations without forming a board of directors or holding formal meetings.
  • Limited Liability: Like other corporations, shareholders’ personal assets are generally shielded from business debts and liabilities.
  • Customized Governance: Internal operations can be governed by shareholder agreements rather than rigid bylaws, offering more flexibility in decision-making.
  • Stronger Control: Shares are typically restricted from transfer without shareholder approval, helping founders and families maintain control of the company.
  • Tax Benefits: Depending on the corporate tax election (e.g., S corporation status), a statutory close corporation may offer pass-through taxation options.

These benefits make statutory close corporations particularly attractive to small businesses, family-run companies, and startups that value control and simplicity while still seeking corporate protections.

Disadvantages and Limitations

While statutory close corporations offer unique advantages, they are not suitable for every business. The simplified structure comes with some trade-offs that potential incorporators should carefully consider:

  • Limited Access to Capital: Because shares are closely held and not publicly traded, raising capital from outside investors can be more challenging.
  • Transfer Restrictions: Share transfers are often subject to shareholder approval, which can limit liquidity and complicate succession planning.
  • State-Specific Requirements: Only certain states recognize statutory close corporations, and the formation requirements vary. Businesses may need to register in another state if their home jurisdiction does not offer this designation.
  • Loss of Flexibility Over Time: As a company grows or seeks external investment, it may outgrow the statutory close corporation structure and need to convert to a standard corporation.

Understanding these limitations is crucial when deciding whether this structure aligns with a company’s long-term goals.

Formation Requirements and Legal Considerations

To form a statutory close corporation, several legal steps must be followed beyond standard incorporation procedures:

  1. Articles of Incorporation: The corporation must include a statement electing statutory close corporation status in its Articles of Incorporation.
  2. Shareholder Agreement: Most states require a written agreement among shareholders outlining governance, share transfer restrictions, and decision-making protocols.
  3. Shareholder Limit: The company must have no more than the maximum number of shareholders allowed (commonly 30 to 50, depending on the state).
  4. No Public Trading: Shares cannot be offered or traded on public markets.
  5. Compliance With State Laws: All governance and operational provisions must align with the statutory requirements of the state of incorporation.

Failing to follow these requirements could result in loss of close corporation status and potential legal liability for shareholders.

States in Which You Can Form a Statutory Close Corporation

There are several states where the statutory close corporation status is available:

  • Alabama
  • Arizona
  • Delaware
  • District of Columbia
  • Georgia
  • Illinois
  • Kansas
  • Maryland
  • Missouri
  • Montana
  • Nevada
  • Pennsylvania
  • South Carolina
  • Texas
  • Wisconsin
  • Wyoming

If the state in which you reside does not allow for this election, you can form your corporation in one of the states where it's possible to choose statutory close corporation status. After your corporation has been formed, you can register in your home state so that you can transact business.

The laws in the state where you form your corporation will govern your company. Although there can be added costs of forming your corporation in one state and registering in another, the benefits will be well worth these costs. Some states do not have special status for statutory close corporation status but do allow for this election.

California Close Corporations

The purpose of a California Close Corporation is to allow the shareholders to more fully control their company. In a California Close Corporation, shareholders will manage the company instead of appointing outside managers. Additionally, by fulfilling the correct requirements, close corporations do not need to follow the corporate formalities that apply to a traditional corporation. Forming a California Close Corporation makes piercing the corporate veil less likely, thus ensuring the personal assets of company owners are protected during lawsuits against the corporation.

Ideal Use Cases for a Statutory Close Corporation

Statutory close corporations are best suited for specific types of businesses and ownership structures. These include:

  • Family Businesses: The governance flexibility and transfer restrictions make them ideal for multigenerational family companies seeking to keep ownership within the family.
  • Small Startups: Early-stage businesses benefit from fewer formalities and lower administrative costs while retaining corporate protections.
  • Professional Practices: Law firms, medical practices, and other professional entities often choose this structure to combine limited liability with hands-on management.
  • Joint Ventures: Businesses formed by a small group of partners who want direct control over operations without external interference.

By aligning the company’s structure with its operational goals, a statutory close corporation can provide both simplicity and legal strength.

Frequently Asked Questions

  1. How does a statutory close corporation differ from a regular corporation?
    A statutory close corporation operates with fewer formalities, allows direct shareholder management, and restricts share transfers, while a regular corporation typically has a board of directors and more regulatory requirements.
  2. Can a statutory close corporation become a standard corporation later?
    Yes. Many states allow statutory close corporations to convert to traditional corporations if they expand, seek public investment, or change their governance needs.
  3. Are shareholder agreements required for a statutory close corporation?
    In most states, a written shareholder agreement is required and serves as the primary governance document in place of bylaws.
  4. What happens if the shareholder limit is exceeded?
    If the number of shareholders surpasses the statutory limit, the corporation may lose its close corporation status and be subject to standard corporate formalities.
  5. Is an attorney necessary to form a statutory close corporation?
    While not legally required, working with an attorney ensures compliance with state-specific statutes, proper drafting of shareholder agreements, and correct inclusion of election language in incorporation documents.

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