Close Corporation

Close Corporation Closely Held Corporation Corporation Types Small Businesses Corporate Governance
A Close Corporation, also known as a Closely Held Corporation, is a type of corporation in which stock is publicly limited to a small group of investors, often involving tighter control and fewer regulations compared to large public corporations.
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Definition

A Close Corporation, also referred to as a Closely Held Corporation, is a type of corporation characterized by a limited number of shareholders who typically participate more actively in the management of the business. These corporations are not publicly traded and often enjoy fewer regulatory requirements compared to large, publicly held corporations. Close corporations usually have a shareholder agreement that restricts the transfer of shares, ensuring that control remains within a small group.

Examples of Close Corporations

  1. Family-Owned Businesses: Many family-owned businesses operate as close corporations, allowing family members to maintain control and participate in the management.
  2. Professional Practices: Law firms, medical practices, and accounting firms often use the close corporation structure to keep ownership and control within a select group of professionals.
  3. Start-Ups: Start-up companies often begin as close corporations to facilitate decision-making among a small group of founders and early investors.

Frequently Asked Questions

What are the main advantages of a close corporation?

  • Control: The small number of shareholders allows for tighter control by the owners.
  • Flexibility: Close corporations can operate with fewer formalities, such as not having to hold annual meetings.
  • Privacy: These corporations are not required to disclose financial information publicly, maintaining privacy.

Are close corporations regulated differently than publicly held corporations?

Yes, close corporations are subject to fewer regulations and reporting requirements than publicly held corporations, which are closely monitored by security regulators.

Can the shares of a close corporation be transferred freely?

Typically, no. Shareholder agreements often restrict the transfer of shares to maintain control within the small group of current shareholders.

Close corporations are recognized under specific state statutes, which provide the framework and regulations for their formation and operation. Each state may have different laws governing close corporations.

  • Public Corporation: A corporation whose shares are publicly traded and subject to stringent regulations and reporting requirements.
  • Shareholder Agreement: A document that outlines the rights and obligations of shareholders and can include restrictions on the transfer of shares.
  • S Corporation: A type of corporation that meets specific Internal Revenue Code requirements, offering tax benefits and avoiding double taxation.
  • Limited Liability Company (LLC): A hybrid business entity offering limited liability to its owners and fewer regulatory requirements.

Online References

  1. Investopedia: Close Corporation
  2. Nolo: Close Corporation
  3. IRS: S Corporations

Suggested Books for Further Studies

  1. “Corporations and Other Business Associations: Cases and Materials” by Charles R.T. O’Kelley and Robert B. Thompson
  2. “Understanding Close Corporations” by Arthur M. Schlesinger
  3. “Corporate Governance: Principles, Policies, and Practices” by R. I. (Bob) Tricker

Fundamentals of Close Corporations: Business Law Basics Quiz

### What is a defining feature of a close corporation? - [x] Limited number of shareholders - [ ] Shares traded on the public market - [ ] Must have a board of directors - [ ] Required to file quarterly reports with the SEC > **Explanation:** A close corporation has a limited number of shareholders who usually participate directly in management. ### Which type of entity is often used by family-owned businesses to maintain control within the family? - [x] Close Corporation - [ ] Public Corporation - [ ] Limited Partnership - [ ] General Partnership > **Explanation:** Family-owned businesses frequently operate as close corporations to keep ownership and control within the family. ### What document commonly restricts the transfer of shares in a close corporation? - [ ] Articles of Incorporation - [ ] Corporate Bylaws - [x] Shareholder Agreement - [ ] Stock Certificate > **Explanation:** Shareholder agreements often contain provisions that restrict the transfer of shares in a close corporation, keeping control within a small group of investors. ### How does a close corporation typically differ from a public corporation regarding regulatory requirements? - [ ] Close corporations have stricter reporting requirements. - [ ] Close corporations must file annual reports with the SEC. - [x] Close corporations are subject to fewer regulations. - [ ] Close corporations must disclose financials quarterly. > **Explanation:** Close corporations enjoy fewer regulatory requirements compared to public corporations, which are closely monitored and have stringent reporting obligations. ### What legal instrument often provides the framework for the operation of close corporations in the United States? - [ ] Federal Law - [x] State Statutes - [ ] Municipal Regulations - [ ] International Treaties > **Explanation:** State statutes provide the legal framework and regulations for the formation and operation of close corporations in the United States. ### Can shareholders of close corporations participate actively in management? - [x] Yes, shareholders typically partake in management. - [ ] No, shareholders are only passive investors. - [ ] Only if they are also directors. - [ ] It depends on the number of shares held. > **Explanation:** Shareholders of close corporations usually take an active role in managing the business, unlike shareholders in public corporations. ### What privacy advantage do close corporations have over public corporations? - [ ] Less scrutiny from tax authorities - [x] No public disclosure of financial information - [ ] Exempt from all federal regulations - [ ] Full exemption from antitrust laws > **Explanation:** Close corporations do not have to publicly disclose their financial information, thus maintaining their privacy. ### In which type of corporation is it easier to make informed decisions quickly? - [x] Close Corporation - [ ] Public Corporation - [ ] Multinational Corporation - [ ] Nonprofit Corporation > **Explanation:** In close corporations, the limited number of shareholders and their active involvement allows for quicker decision-making processes. ### Which entity is NOT typically subject to the strict formalities required of public corporations? - [ ] Multinational Corporations - [ ] Nonprofit Organizations - [ ] Large Publicly Traded Companies - [x] Close Corporations > **Explanation:** Close corporations are generally exempt from many of the strict formalities that public corporations must follow, such as holding annual shareholder meetings and filing extensive reports. ### What type of professional business is often structured as a close corporation? - [ ] Multinational Corporation - [ ] Nonprofit Organization - [x] Professional Practice (law firms, medical offices) - [ ] Charity organization > **Explanation:** Professional practices such as law firms and medical offices often structure themselves as close corporations to maintain control among a small group of professionals.

Thank you for exploring the comprehensive world of close corporations with us and tackling our insightful quiz questions on business law fundamentals. Keep advancing your legal and business knowledge!

Wednesday, August 7, 2024
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