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 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.

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.

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Key Elements of a Close Corporation

Close Corporations are Frequently Used For:

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 Director’s 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."

 

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