What is a Statutory Close Corporation
a statutory close corporation is an election that corporations can choose in their Articles of Incorporation.3 min read
2. States in Which You Can Form a Statutory Close Corporation
3. California Close Corporations
Updated November 12, 2020:
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.
States in Which You Can Form a Statutory Close Corporation
There are several states where the statutory close corporation status is available:
- District of Columbia
- South Carolina
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.
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