When it comes to ownership, some corporations go big: Microsoft says it has more than 7 billion outstanding shares. Other owners prefer a closed corporation with a much smaller number of shares owned by a small, select band of owners. This limits growth compared to giants like Microsoft and Disney, but the owners retain much greater control. That’s one of several advantages of the close corporation as a business form.
Incorporating as a closely held company lets you keep greater control than if you have thousands of stockholders. You can also eliminate much of the ordinarily mandatory corporate bureaucracy. It may cost you extra to draw up a good shareholder agreement, though.
A closely held corporation is a corporation in which just a few individuals hold more than half of the shares.
Learn more about closely held corporations, how they work, and their pros and cons.
What Is a Closely Held Corporation?
Closely held corporations are businesses where a few individuals own the majority of shares.
Alternate name: Close corporation
The vast majority of small corporations in the U.S. are closely-held. To qualify as a closely held corporation, a business must fit the following requirements:
Have more than 50% of the value of its outstanding stock owned, directly or indirectly, by five or fewer individuals at any time during the last half of the tax year
Not be a personal service corporation
How Closely Held Corporations Work
A closely held corporation, by definition, is a private corporation because its shares are not traded publicly on a stock exchange. The shareholders may be family members, business partners, or any small number of investors. A closely held corporation is a private corporation, but a private corporation may or may not be closely held; the critical distinction is the number of shareholders.
The following characteristics describe the features of a Closely Held Corporation:
Limited number of shares (set by individual states)
Informal operating structure
Shareholders operate the business
Decisions are made based on the shareholder agreement
Closely Held Corporation Taxes
A closely held corporation may be a C corporation or S corporation, which is an important classification for tax reasons. If you form a closely held corporation, and it meets the IRS criteria for S corporation status, all profits are passed through to the owners’ personal tax returns. If it’s classified as a C corporation, it will be subject to regular corporate taxes, and owners will also be responsible for paying personal taxes on the income received from the corporation.
Less regulations: Closely held corporations don’t have to abide by as many corporate regulations as publicly traded companies, which are regulated by the Securities and Exchange Commission. This allows them to forgo many formalities like filing financial statements.
More control: Since there are few shareholders, owners have more control over the company. They can make business decisions without consulting with a board of directors or relying on public shareholder votes. This allows them to run the company how they want.
Closely held businesses have fewer regulatory requirements than other corporate entities. For example, you do not have to hold an annual meeting or establish a board of directors.
As a majority owner in this type of company, you retain a significant amount of control. Conversely, issuing more stock shares dilutes your control, potentially putting key aspects of the company in the hands of outside shareholders.