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What defines a closely held business?

On Behalf of | May 26, 2022 | Business Formation & Planning

Businesses can come in one of several legal formats, each with its own advantages and disadvantages. These can range from relatively straightforward sole proprietorships to highly complex corporations. Somewhere in between these extremes is the closely held business. This somewhat loose term can be used to describe the majority of corporations in the United States.

 The term “closely held” refers to the number of shareholders. There are a few common characteristics of a closely held corporations, including:

  • Closely held corporations have only a few shareholders.
  • Closely held corporations have a limited number of shares determined by state law.
  • Closely held corporations have an informal operating structure.
  • Closely held corporations are operated by shareholders who conduct the business of the company.
  • Decisions concerning a closely held corporation are made according to the shareholder agreement.

To qualify as a closely held corporation, 50% of the value of the company’s outstanding stock needs to be owned by five or fewer individuals at any time during the last half of the tax year. The company must also not be a personal service corporation. Closely held corporations may be taxed as an S corporation or a C corporation.

Closely held corporations may enjoy fewer regulations and greater control for the owners over the management of the company. They may also have some disadvantages. For instance, it may be more difficult to sell shares or raise capital when needed. Business leaders have a lot to consider when they are forming a new business or expanding an existing one. Attorneys with experience in business law can help them weigh their options.