Many business people want the advantages of a corporate business structure but have no intention of allowing the public to buy shares of stock in the company. Closely held corporations are private companies that are owned by a small group of people. Since the corporation's shares will never be sold to outside investors, the corporation is not required to reveal its management and financial information to the public. Closely held corporations operate just like regular corporations and can engage in business of any size or scope.
A Small Group of Shareholders
Closely held corporations are formed under state law. Most states have a section of their corporation statute that allows for the formation of a special type of corporation with a limited number of owners. Typically, states require closely held corporations to have no more than 35 shareholders. The Internal Revenue Service adds a further restriction by requiring that 50 percent of the company be owned by no more than five shareholders.
Ownership Transfers Are Restricted
One of the special features of a closely held corporation is a restriction on ownership transfers. A closely held corporation can't go public. Shareholders are not allowed to sell their shares on a stock exchange. In fact, some states prohibit the sale of stock in closely held corporations entirely. These states require that shareholders sell their stock back to the corporation if they want to exit the business. This type of restriction on the transferability of ownership makes the closely held corporation particularly useful for family businesses.
Management Issues Can be Settled by Agreement
Shareholder agreements are commonly used to set up management procedures in closely held corporations. With so few shareholders, disagreements can devastate the business. A shareholder agreement can establish who has the right to run the business and provide for dispute resolution when there is a conflict. Buy-sell agreements are typically put in place in a closely held corporation to establish a sales price for a shareholder's stock in the company, in case a shareholder wants to withdraw from the business. Such agreements also restrict sale of the stock to outside parties.
Minority Shareholders Have Rights
The law protects minority shareholders in closely held corporations. Most state laws allow minority shareholders to bring claims of fraud, mismanagement, and unfair dealings to court for a judge to decide the issue if the shareholders can't agree. A court can also resolve ownership issues if a shareholder wants to sell shares back to the corporation but can't agree on a fair price.
A Business Lawyer Can Help
The law surrounding closely held corporations is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.