Close Corporation Definition

A Close Corporation is a type of business structure where ownership is limited to a small group of individuals, often family members or a few shareholders, and it typically has less stringent reporting and regulatory requirements compared to a publicly traded company.

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What is a close corporation?

The definition of a close corporation is a shareholder-owned business that doesn’t trade or list its stock on the stock exchange. State law usually limits how many shareholders a close corporation can have.  Some states allow for a statutory close corporation, i.e., allowing you to form a close corporation legal entity. Others don’t.

That’s not all that goes into the close corporation definition. Close corporations may have special rules to follow about other matters, like:

  • How and when shareholders can transfer shares to others
  • Who manages the close corporation (i.e., shareholders or the board of directors) 
  • The close corporation’s governance documents (like bylaws and Articles of Incorporation) 

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Close Corporation Benefits (and Disadvantages)

Now that we have the close corporation meaning out of the way, let’s talk about the potential close corporation advantages. These include:

  • Less strict financial reporting requirements
  • May not have to follow formalities (e.g., may not have to regularly call meetings)
  • May pay less in taxes
  • Flexibility in how the government taxes the close corporation

Here are some close corporation disadvantages to keep in mind:

  • Potentially costs more to start one than, say, a limited liability company
  • Restricts how and when existing shareholders can transfer their shares
  • Decreases the opportunity for outside investment

Just because there are disadvantages doesn’t mean it’s a bad idea, though. Let’s talk about the considerations that go into forming a close corporation. 

Close Corporation Considerations

Close corporation benefits include more lenient reporting requirements. Further, the shareholders can manage the corporation, rather than a board of directors. Save money on taxes by electing that the government tax the close corporation as an S or C corporation. 

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Other Names for Close Corporation

Want to know how else to refer to a close corporation? Thought so. Here are other names for a close corporation:

  • Closely held corporation
  • Closed corporation
  • Privately held corporation
  • Private corporation
  • Unlisted corporation

Close corporation examples include Hobby Lobby and Mars, Inc.

Summary

Forming a close corporation is a way for a small, close-knit group of shareholders to own and operate a business. By organizing your small business as a close corporation, you may save money on taxes and simplify your business processes. 

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Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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Written by Team ZenBusiness

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