Corporate Business Structures | Structuring Your Business

Close Corporations

This Close Corporation information contains the following sub-sections:

DESCRIPTION

In Close Corporations shareholders are actively involved in managing and operating the corporate business. Shareholders have a written Shareholder's Agreement defining how management decisions are made and what restrictions apply to stock sale.

Close corporate structures are generally smaller corporations that elect Close Corporations status and is therefore entitled to operate without the formalities normally required in the operation of other corporation structures. Many small-business owners find this feature very important.

Close Corporate structures enable you less formally operation, however there are restrictions on corporate shares. Generally speaking, close corporations cannot have more than a particular number of shareholders - the limit is typically between 30 and 50 in most states.

The close corporation election is made at the state level, and state laws vary with respect to close corporate structures and the rules governing them. Some states do not authorize them. Close corporations cannot make a public offering of its stock.

FEATURES

In operation, a close corporation is a corporation whose shareholders and directors are entitled to operate much like a partnership. Typically, shareholders must agree unanimously to close corporation status, and a written shareholders' agreement governing the affairs of the corporation must be drafted. Shareholders' agreements are fairly complex and should probably be left to experience counsel.

Close corporations enjoy simplified rules with respect to the formalities of governance. Close corporation shareholders typically do not need to hold annual meetings. Close corporation shareholders may override the directors and act on their own.

Typically, the statement electing close corporation status must appear in the articles of incorporation. The following typical clause declares close corporation status in the Articles of Incorporation: This Corporation is a close corporation and all classes of shares of this Corporation's shall be held on record by not more than 35 persons.

The shares in close corporate structures are subject to resale restrictions by shareholder agreements and state law. Shareholders in close corporations have a great degree of control over other shareholders who wish to sell their shares to outsiders. Typically, close corporation shareholder agreements contain provisions providing existing shareholders first rights of refusal of stock sales or transfers of shares. Therefore, control of close corporations remains with a small number of shareholders.

Close corporations are generally more expensive to organize than C Corporations or Sub-S Corporations because they require a written shareholder agreement, which typically must be provided by an attorney. However, close corporations require fewer continuing corporate formalities.

CHOOSING TO IMPLEMENT A CLOSE CORPORATE STRUCTURE

The Close Corporate structure provides a simplified operational structure once it is properly implemented. When considering this corporate structure the following conditions should be understood:

  • This structure works best with smaller corporate structures.
  • Close corporations cannot make a public offering of its stock.
  • Most states limit the number of shareholders between 30 and 35.
  • The necessary Shareholder Agreements are relatively complex and typically require experienced counsel.
  • Close corporation shareholders typically do not need to hold annual meetings.
  • Close corporation shareholders may override the directors and act on their own.
  • Close corporation shares are subject to resale restrictions by shareholder agreements and state law.
  • Close corporations are generally more expensive to organize than C-Corporations or Sub-S Corporations.

TYPICAL USES

A close corporation is generally a smaller corporation wherein a limited number of shareholders want to operate with reduced formalities and they are actively involved in managing and operating the corporate business. Shareholders use a written Shareholder's Agreement defining how management decisions are made and what restrictions may apply to the sale of stock.

The shares in a close corporation are subject to resale restrictions by shareholder agreements and state law. Shareholders in close corporations have a great degree of control over other shareholders who wish to sell their shares to outsiders. Typically, close corporation shareholder agreements contain provisions providing existing shareholders first rights of refusal of stock sales or transfers of shares. Therefore, control of close corporations remains with a small number of shareholders.

TAX COMPLIANCE

The close corporation laws enable the Close Corporation to choose to assign the corporate tax liability as a C-Corporation or as a Sub-S Corporation. The Sub-S choice adds complexity to the corporate structuring and is typically implemented through filings created by legal counsel.

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