Close Corporation Definition

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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