What Is a Close Corporation?

A close, or "closely held," corporation is a type of venture where the shareholders, directors and officers are typically the same people, and where all parties desire to remain a small, tight-knit group. Close corporations are restricted to no more than 30 shareholders.

A Delaware close corporation may be structured and run like a partnership with regard to management, division of profits, election of officers, employment of shareholders and other aspects—all with the legal protection of a corporation.

Additionally, restrictions on the sale, transfer or disposition of stock may be written into the bylaws of a close corporation, and shareholders always have the contractual "right of first refusal" to buy shares before any third-party if a fellow stockholder decides to sell. This right is typically why close corporations are only formed by families or close friends.

In extreme cases, where the shareholders of a close corporation are deadlocked and unable to effectively manage the company, the Delaware Court of Chancery may be petitioned by the corporation's directors or shareholders to appoint an impartial provisional director.

Benefits of a Close Corporation

• The shareholders face limited liability for any debt that the close corporation may face.
• Close corporations have a lot more flexibility since there are fewer formalities to abide by. With such a small board, there’s a lot less pressure from shareholders for recurring performance reports. Instead, shareholders are able to make decisions faster, with fewer voting parties.
• Close corporations can opt into S-Corporation tax status, since close corporations are business structures regulated by the state and S-Corporations are taxable entities.

Form a close corporation today with the help of Harvard Business Services, Inc. Our team will help you start the process and get your Close Corporation Certificate.

Key Elements of a Close Corporation

• Restricted to no more than 30 shareholders
• There are restrictions on the sale or transfer of stock
• Limited liability for shareholders
• Close corporations may be run like partnerships, with all corporate benefits
• Can be Subchapter S if all qualifications are met and IRS Form 2553 is filed in a timely manner

Close Corporations are Frequently Used For:

• Small, tight-knit business groups
• Family ventures
• Companies that want less formal proceedings
• Restricting transfer of stock

History of the Close Corporation

When corporations were first introduced in Delaware in 1875, you had to have at least three people working together to form a corporation. The whole idea of a single person corporation was not even envisioned by the early lawmakers. But entrepreneurs demanded control so they would include their lawyer and perhaps a secretary to be the stand-in shareholders to meet the requirement.

The law was also very strict about the separation between the three tiers of power in a corporation: the Shareholders, the Directors and the Officers. It was unthinkable that one person could be all three all at once. Every year the company would have to have a Shareholders’ meeting, with a few Board of Directors meetings throughout the year, to direct the Officers of the company on the day-to-day affairs.

Delaware, as usual, was the first state to respond to this need for control, desire to own, run, and operate a company by a single person or a small tight-knit group. This is the “Close” or “Closely Held Company."