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Is a closely held corporation right for your business?

On Behalf of | May 14, 2024 | Business Law

When you are starting a business, you have many concerns. However, after the business is formed and operating, you might begin to question how best to manage your private business. One question you might face it to whether it should be closely held or not.

What is a closely held corporation?

When it comes to private corporations, they may or may not be closely held. The true distinction is the number of shareholders the corporation has. In simple terms, a closely held corporation is a corporation in which the majority of the business shares are owned by a few individuals.

To be considered a closely held corporation, the company must meet certain requirements. First, more than half of the value of stock owned must be owned, directly or indirectly, by five or fewer individuals during the last half of the tax year. Next, the business cannot be a personal service corporation, such as professionals like physicians, attorneys, architects and the like. Additionally, the shares of a closely held corporation are not publicly traded on a stock exchange.

Often, the shareholders are family members, business partners or a small group of investors. Other characteristics include a limited number of shares, which is set by the state it operates in, informal operating structure, the business is operated by the shareholders and the business decisions are made in accordance with the shareholder agreement.

Pros and cons

There are various pros and cons to assess when considering a closely held corporation. A positive of a closely held corporation is that there are less regulations. In other words, they are not required to abide by most corporate regulations, as closely held corporations are not regulated by the Securities and Exchange Commission. Another pro is having more control. Because there are only a few shareholders, the owners have more control of the business and can make decisions without consulting with the board of directors.

The cons of a closely held corporation include the process they must follow to sell shares, the challenges faced when trying to raise money and the taxation of the business. Because the pool of potential buyers is small, it can be difficult to find a buyer or reach an agreement on the sale. Because shares are not sold on a public stock exchange, a closely held business will rely on capital contributions from the owners. A closely held corporation could be treated like a C corporation for tax purposes. This can result in double taxation.

Navigating business law matters, such as starting or operating a closely held business, can be challenging. A legal professional can help guide you through the process, providing insight and answers to your questions and concerns.