Close Corporation, also known as a Closely Held Corporation, refers to a type of corporation in which the ownership is characterized by a small number of shareholders. These corporations are not publicly traded, and shareholder agreements can often include restrictions on the transfer of shares.
What Defines a Close Corporation?
A Close Corporation is legally defined by having:
- Restricted Share Transfers: Shares are not freely transferable, often requiring approval from other shareholders or the corporation itself for any transfer.
- Limited Number of Shareholders: Typically ranging from a few to a limited number, depending on jurisdictional laws, often not exceeding 50 shareholders.
- Non-Public Trading: Shares are not listed or traded on public stock exchanges.
Historical Context of Close Corporations
The concept of a Close Corporation has been evolving since the late 19th and early 20th centuries when small business owners sought ways to maintain control over their companies without the complexities of public corporations. Over time, jurisdictions around the world, especially in the United States and Europe, have developed specific legal frameworks to accommodate this business structure.
Key Characteristics of Close Corporations
Shareholder Agreement
A central feature of a Close Corporation is the shareholder agreement, which outlines the terms and conditions of share transfer, dispute resolution mechanisms, governance, and other critical management aspects.
Governance Flexibility
Close Corporations often enjoy more flexibility in governance compared to publicly traded companies. They can operate without a formal board of directors, allowing for more personalized and direct management by the shareholders.
Limited Disclosure Requirements
One significant advantage is the reduced obligation for financial reporting and disclosure compared to publicly traded corporations. This contributes to operational confidentiality and simplicity.
Examples and Applicability
Private Family Businesses
Private family-owned businesses often opt for a Close Corporation structure to maintain family control and keep business operations private.
Small and Medium Enterprises (SMEs)
SMEs that do not wish to go public due to the complexities and costs involved may choose to remain as Close Corporations.
Startups
Startups in their early stages might operate as Close Corporations to maintain control until they are ready to attract larger investments or go public.
Special Considerations
Legal Compliance
Different jurisdictions offer varying legal definitions and requirements for Close Corporations. For instance, in the United States, the Model Business Corporation Act provides specific statutes for Close Corporations.
Shareholder Disputes
Due to the personal nature of Close Corporations, shareholder disputes can become intensely personal and complex, requiring careful drafting of shareholder agreements.
Tax Implications
Close Corporations may have particular tax implications, including the possibility of tax advantages observed in different tax jurisdictions.
Related Terms
- Closely Held Corporation: Essentially synonymous with a Close Corporation, emphasizing the tight control of shares and limited number of shareholders.
- S Corporation: A type of close corporation in the U.S. allowing profits to be passed through directly to shareholders to avoid double taxation while still enjoying limited liability.
FAQs
Can a Close Corporation become a publicly traded company?
What are the disadvantages of a Close Corporation?
How does a Close Corporation compare to an LLC?
References
- Model Business Corporation Act.
- U.S. Internal Revenue Code on S Corporations.
- Historical literature on corporate structures by business historians.
Summary
A Close Corporation or Closely Held Corporation offers a unique blend of simplified governance, privacy, and limited shareholder numbers, making it a favorable choice for small enterprises, family-owned businesses, and startups. While offering flexibility and confidentiality, it requires careful legal planning to navigate possible disputes and regulatory requirements.
This entry on Close Corporations encapsulates their foundational principles, practical examples, historical insights, and related terminology, contributing to a comprehensive understanding of this pivotal business structure.
