In the USA, a closely held corporation is a public corporation that has only a limited number of stockholders and consequently, few of its shares are traded.
Historical Context
The concept of the closely held corporation has been prevalent since the early 20th century when the modern corporate structure was established. Unlike widely-held corporations with dispersed ownership, closely held corporations typically feature concentrated ownership among a few individuals, often family members.
Types/Categories
Family-Owned Businesses
These are often run by multiple generations of a family and maintain control over shares to keep ownership within the family.
Small to Medium Enterprises (SMEs)
These businesses often start as closely held corporations due to limited initial investment and restricted share distribution.
Professional Firms
Law firms, medical practices, and accounting firms frequently opt for this structure to maintain control over management decisions.
Key Events
Introduction of S-Corporations (1958)
The S-Corporation structure allowed closely held corporations to enjoy pass-through taxation benefits, reducing the tax burden on small business owners.
Small Business Job Protection Act (1996)
This Act included provisions that further defined and supported closely held corporations, including tax reforms and benefits.
Detailed Explanations
Characteristics
- Limited Stockholders: Typically fewer than 35 stockholders.
- Shares Not Publicly Traded: Shares are often held within a closed group and are not widely available on public stock exchanges.
- Personal Management: Often managed directly by the shareholders who are typically the founders or their families.
- Flexible Governance: Governance structures can be less formal, allowing for more personalized decision-making processes.
Mathematical Formulas/Models
Although there aren’t specific mathematical models exclusive to closely held corporations, financial analysis still applies. Key financial metrics include:
Dividend Yield Formula
Earnings Per Share (EPS)
Charts and Diagrams
graph TD
A[Closely Held Corporation] --> B[Limited Stockholders]
A --> C[Shares Not Publicly Traded]
A --> D[Personal Management]
A --> E[Flexible Governance]
B --> F[Family-Owned]
B --> G[Small to Medium Enterprises]
B --> H[Professional Firms]
Importance and Applicability
Closely held corporations play a significant role in fostering entrepreneurship and preserving family legacies. They allow owners to maintain control over their businesses, make swift decisions, and sustain cultural and operational ethos.
Examples
- Mars, Incorporated: A classic example of a successful family-owned and closely held corporation.
- Cargill: One of the largest private corporations globally, Cargill remains closely held by its founding family.
Considerations
- Liquidity Constraints: Shares are not easily sold or traded, which can limit the ability to raise capital.
- Succession Planning: Critical for family-owned businesses to ensure smooth transitions.
- Regulatory Compliance: Even if not publicly traded, closely held corporations must comply with state regulations and filings.
Related Terms
- Public Corporation: A company with many shareholders and traded on public stock exchanges.
- Private Corporation: A company whose shares are not available to the public.
- S-Corporation: A special designation that allows a company to enjoy pass-through taxation.
Comparisons
Closely Held vs. Public Corporations
- Ownership: Concentrated vs. Dispersed
- Shares: Not publicly traded vs. Publicly traded
- Management: Direct involvement of shareholders vs. Professional management
Interesting Facts
- Closely held corporations constitute a significant portion of the U.S. economy.
- Many famous global brands started as closely held corporations.
Inspirational Stories
- Ford Motor Company: Started as a closely held corporation, with the Ford family maintaining control for generations, steering it through challenging times to become an automotive giant.
Famous Quotes
- “Family is not an important thing, it’s everything.” – Michael J. Fox. This reflects the ethos of many family-owned closely held corporations.
Proverbs and Clichés
- “Blood is thicker than water,” symbolizing the strong familial ties often present in closely held corporations.
Expressions, Jargon, and Slang
- “Closely Held”: Refers to the limited public availability of a company’s shares.
- [“Going Public”](https://financedictionarypro.com/definitions/g/going-public/ ““Going Public””): The transition from a closely held corporation to a publicly traded one.
FAQs
What is a closely held corporation?
A closely held corporation is a type of public corporation that has a small number of shareholders and whose shares are not publicly traded.
What are the benefits of a closely held corporation?
Benefits include greater control by shareholders, personalized management, and flexibility in governance structures.
Can closely held corporations convert to public corporations?
Yes, they can go public by issuing shares on public stock exchanges, although this involves substantial regulatory compliance and transparency.
References
- Internal Revenue Service (IRS)
- U.S. Securities and Exchange Commission (SEC)
- Small Business Administration (SBA)
Summary
A closely held corporation is a corporate structure where ownership is concentrated among a few individuals, often family members, with limited public trading of shares. This form offers significant control and flexibility, making it ideal for family businesses and small enterprises. With strategic governance and succession planning, closely held corporations can achieve significant growth while preserving their core values.
This comprehensive entry covers various facets of closely held corporations, providing readers with a thorough understanding of their characteristics, importance, and considerations.
