Close Corporation Laws

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What is a Close Corporation?

A close corporation is defined as a corporation that is owned by a limited number of stockholders. Laws governing close corporation requirements vary from state to state, but most laws state that a close corporation cannot have more than 35 shareholders. Close corporations are often comprised of family members, and the members are usually relatively active in the day-to-day affairs of the business.

Most state laws allow close corporations to operate less formally than other types of corporations. For example, sometimes close corporation members can make decisions without a formal meeting with the board of directors. In order to claim close corporation status, the organization must state this in their articles of incorporation.   

Finally, the treatment of stocks is different in a close corporation. Due to shareholder agreements, shareholders usually have much more control over how stocks are bought, sold, or resold. Also, close corporations are prohibited from making public offerings of their stock. 

What are the Pros and Cons of Close Corporations?

There are many pros and cons associated with close corporations. Of course, depending on your needs, the unique characteristics of a close corporation can either work for or against your business goals. A simple summary of a close corporation is that it combines the liability and debt protection of regular corporations with a more relaxed and informal flow of governance mechanisms.   

In general, some of the advantages of a close corporation include:

Some disadvantages of close corporations are:

Before you decide to file for close corporation status, you should review the various features and limitations associated with this type of business structure. Also, be sure to review your state’s laws and requirements on close corporations, since they can differ widely by jurisdiction. Some states do not allow close corporations, though you can always incorporate in a different state if you are qualified to do so.

Do I Need a Lawyer to Start a Close Corporation?

In any close corporation, the central focus will usually be on the shareholder agreement, which gives the shareholders the power to sell stocks or restrict stock sales. These can often be quite complex because they must reflect the overall goal of the organization while considering the shareholders’ backgrounds. It is in your best interest to have a lawyer draft and review your close corporation’s documents, including the bylaws and articles of incorporation. Also, should and corporate disputes arise, a lawyer may be necessary to represent your company’s interests.   

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Last Modified: 08-15-2011 04:12 PM PDT

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