A "closely-held business" is a business entity whose shares are held by only a small number of stock holders. The stock holders typically have a common interest in the company (i.e., family members), and the shares of stock are generally not traded in the public stock market.
The most common form of a closely-held business is that of the close corporation. This is a type of corporation that is owned and “closely-held” by a smaller number of persons than a standard corporation. However, other types of businesses are also considered to be closely held entities. These may include:
- Sole Proprietorships
- Business that are owned by a single owner, without a separate legal entity for holding or operating the company
- Any other business entity that has a small number of owners and stocks that are not publicly traded
Closely-held corporations are often held out as being in contrast to publicly traded corporations, even though they perform similar functions and have a similar function and form. For example, both types of business entities follow similar procedures when it comes to legally forming the company.
Also, both closely-held businesses and major, publicly traded corporations need to enlist the services of a lawyer at many stages. This is because business activities can be complex, despite the small size of a closely-held business.
The main difference between a closely-held business and a publicly traded corporation lies in the nature of their company stocks. For public corporations, the shares are traded publicly, and a market already exists for the types of shares being traded.
In contrast, shares for closely-held businesses are usually not made public because a market does not exist for the shares, or the demand for such shares is low, or the company is very unique. The shares are usually traded amongst a small, well known community such as relatives or acquaintances of the business persons.
Closely-held businesses offer a variety of benefits and advantages. If you are considering starting up a business, you may wish to consult with a lawyer for advice on whether to keep your business closely held.
Some of the advantages of closely-held businesses are:
- Efficiency: Company decisions and policies can occur more rapidly and efficiently in a closely-held business due to its small size. Communication amongst members is generally less complex.
- Control: Closely-held companies are often able to manage profits and losses with more control, since they are less subject to public market fluctuations.
- Community Contributions: A closely-held business is more likely to remain in a single location, even through “hard times.” This often serves to benefit the surrounding community
- Worker Relations: Closely held companies often maintain more intimate worker-to-worker relationships. Also, workers are less subject to layoffs, since the shareholders usually absorb the losses instead of passing them off to the workers.
One of the main disadvantages of closely-held companies is that personal interests can often influence company decisions and vetoes. This is not usually the case in public corporations, as investments are usually made in an impersonal manner.
In fact, factions can sometimes occur in a closely-held company, resulting in disputes that need to be legally resolved in court. In such cases, each conflicting party may need to be represented by their own attorney in order to reach a suitable agreement. Company lawyers usually cannot represent both parties from the same entity if the conflict is internal.
Another disadvantage is that smaller companies may be limited in terms of their ability to expand. If the company begins to grow beyond expected limits, the organization may have to adopt a new corporate form and restructure their business entity.
Although there are many advantages to forming a closely-held business, legal issues can still arise in connection with the company. It may become necessary to hire a business lawyer if there are any disputes, or if the company needs to readjust their corporate form. Also, it may be wise to hire a lawyer before formation begins, so that they can assist with the legal aspects of business planning.