Definition
A closely held corporation, also known as a close corporation, is a type of corporation in which a small group of shareholders controls most of the shares and, consequently, has significant influence over company decisions. These shareholders often include the company’s founders, family members, or a limited group of investors. Due to the limited number of shareholders, the shares of a closely held corporation are rarely traded publicly, and the stock is often subject to transfer restrictions.
Examples
- Family-Owned Businesses: Many family-run businesses opt for closely held status to maintain control within the family.
- Startups: Early-stage tech startups frequently remain as closely held corporations to keep control among the founders and a few investors.
- Law Firms and Professional Corporations: These companies often prefer a tightly-knit group of owners.
Frequently Asked Questions
What are the primary characteristics of a closely held corporation?
A closely held corporation typically has a limited number of shareholders, shares that are not publicly traded often, and may have certain restrictions on the transfer of shares.
Is a closely held corporation the same as a private corporation?
Not exactly. While a closely held corporation is often private, the term “private corporation” generally refers to any non-public company. A closely held corporation emphasizes the limited number of shareholders and restrictions on share transfer.
Can a closely held corporation transition to a public company?
Yes, if the corporation meets regulatory requirements and often goes through an Initial Public Offering (IPO), it can transition to a public company. However, this involves significant changes in governance and regulatory compliance.
What legal protections are available for minority shareholders in closely held corporations?
Minority shareholders have certain protections under state laws, including rights related to financial transparency and, under certain conditions, can challenge actions that unfairly disadvantage them.
- Public Corporation: A corporation whose shares are publicly traded and held by numerous shareholders.
- Initial Public Offering (IPO): The process through which a private company becomes a public company by offering its shares for public sale.
- Stockholders: Individuals or entities that own shares in a corporation, making them part-owners of the company.
- Share Transfer Restrictions: Limitations placed on the sale or transfer of shares to maintain control within a specific group of investors.
Online Resources
Suggested Books for Further Studies
- “The Essentials of Corporate Law and Governance” by Thomas W. Joo
- “Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, and Jeffrey F. Jaffe
- “Corporate Governance” by Robert A. G. Monks and Nell Minow
Accounting Basics: “Closely Held Corporation” Fundamentals Quiz
### How many shareholders typically characterize a closely held corporation?
- [ ] Thousands
- [ ] Hundreds
- [x] A small group
- [ ] No specific number
> **Explanation:** A closely held corporation is characterized by having a small group of shareholders who usually have significant control over decision-making processes.
### Are shares of closely held corporations actively traded in public markets?
- [ ] Yes, very actively.
- [ ] Occasionally.
- [x] Rarely
- [ ] Always
> **Explanation:** Shares of closely held corporations are rarely traded publicly and often come with restrictions on transfer.
### Can a closely held corporation eventually go public?
- [x] Yes
- [ ] No
- [ ] Only under specific conditions
- [ ] It depends on the industry
> **Explanation:** If a closely held corporation meets regulatory requirements and undergoes an Initial Public Offering (IPO), it can transition to a public company.
### What types of businesses commonly form closely held corporations?
- [x] Family-owned businesses
- [ ] Large conglomerates
- [ ] Government organizations
- [ ] Non-profit organizations
> **Explanation:** Family-owned businesses, startups, and professional corporations often form closely held corporations to maintain control within a tight group.
### Which of the following accurately describes the transfer of shares in a closely held corporation?
- [x] Shares often have transfer restrictions
- [ ] Shares are freely sold on public exchanges
- [ ] Shares can be transferred without any restrictions
- [ ] Shares are frequently traded daily
> **Explanation:** Closely held corporations often place restrictions on the transfer of shares to maintain control over the ownership structure.
### Can minority shareholders in a closely held corporation challenge actions that disadvantage them?
- [x] Yes, if state laws provide protections
- [ ] No, they have no protections
- [ ] Only after owning shares for a certain period
- [ ] Only if they own more than 50% of the shares
> **Explanation:** State laws provide certain protections for minority shareholders, allowing them to challenge actions that may unfairly disadvantage them.
### What is a key benefit for business owners to maintain a closely held corporation status?
- [ ] Unlimited access to public finance
- [x] Greater control over decision-making
- [ ] Reduced regulatory compliance
- [ ] Increased shareholder disputes
> **Explanation:** A closely held corporation status allows business owners to maintain greater control over corporate decisions because of the limited number of shareholders.
### Which entity typically regulates the Initial Public Offering (IPO)?
- [ ] National Association of Securities Dealers (NASD)
- [x] Securities and Exchange Commission (SEC)
- [ ] Internal Revenue Service (IRS)
- [ ] Federal Trade Commission (FTC)
> **Explanation:** The Securities and Exchange Commission (SEC) typically regulates and oversees the process of Initial Public Offerings (IPOs).
### Why might startups remain as closely held corporations in the early stages?
- [ ] To gain instant liquidity
- [ ] To avoid public disclosure
- [x] To retain control among founders and investors
- [ ] To minimize capital raising efforts
> **Explanation:** Startups often remain as closely held corporations in the early stages to keep control among founders and initial investors.
### What term best describes the public process through which a closely held corporation offers its shares to the public?
- [ ] Secondary Offering
- [ ] Merger
- [x] Initial Public Offering (IPO)
- [ ] Leveraged Buyout (LBO)
> **Explanation:** The process through which a closely held corporation offers its shares to the public for the first time is called an Initial Public Offering (IPO).
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
