Not many people outside the business world know the difference between closely held corporations, private corporations, or public corporations. While there are some similarities between them, there are also some distinct differences. The type of corporation makes a difference in how the company is traded, taxed, managed, and more. Following is an explanation of what closely held corporations are and some of the issues inherent in this type of company.
Definition of a Closely Held Corporation
The main difference between the different types of corporations is how shares of the company are traded and how many shareholders are involved. A closely held corporation is one where there is a small group of shareholders who own, manage, and control the operations of a company. Many family owned businesses are considered closely held corporations. In fact, more than 90% of all businesses in the United States are considered closely held corporations. Another name for closely held corporations is “closed corporations.”
How are Closely Held Corporations Different from Other Corporations
Privately owned companies have stock that is never publicly traded on the stock market. Closely held corporations can trade their shares on the open market, although it does not happen very often. A widely held company or a publicly held company can have thousands or even millions of shareholders and has stock that is regularly traded on the public stock market.
Issues Inherent in Closely Held Corporations
Valuation is one issue that comes up in closely held corporations. It is difficult to determine what the value of these companies is since the shares are held by such a small group of people that are often family members. There is no market price to base the shares on to determine what the market value of the company should be. The IRS has established guidelines that appraisers and courts follow when trying to determine fair market value. Some of the factors that they look at include the history of the company, earning capacity, economic outlook, goodwill built up in the community, and more. Determining the correct value of the company is important when trying to sell either shares or the company itself. In a family owned company, the IRS needs to know the real value of the company for estate or gift taxes.
Shareholder agreements are another issue that comes up with closely held corporations more frequently that any other type of company. In a company with few major shareholders running the business, the exit of even one shareholder could have a drastic impact on the company. Shareholder agreements are documents that spell out the terms of any transfer of shares, along with other information. This protects the company from outsiders when one shareholder dies or chooses to pull out.
Advantages to a Closed Corporation
The obvious advantage for a closed corporation is that the transfer of shares is restricted and this will keep outsiders away from the company. Since the shares are rarely sold on the public stock market, it is virtually impossible for a hostile takeover of the business.
The basic difference between closely held corporations and other types of corporations is not difficult to understand. While this article just gives a general overview, you can find more detailed information on closely held corporations with a quick internet search.