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What is a Closely Held Corporation?

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  • Written By: Mary McMahon
  • Edited By: C. Wilborn
  • Last Modified Date: 31 August 2016
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A closely held corporation is a public corporation controlled by a small percentage of shareholders. While some shares are sold on the public market, the shares held by majority shareholders are not publicly available. This type of corporation is sometimes referred to as a private corporation, which is not quite accurate, although some private corporations are closely held. The vast majority of corporations worldwide are closely held corporations.

The classic example of a closely held corporation is a family business. In such cases, five or fewer members of the family control at least 50% of the shares, shaping the direction of the company with their ownership, and other shares are traded among other family members as well as members of the public. The ownership and management of a closely held corporation are often the same, something that is again very commonly seen in family companies.

One advantage to being closely held is that it is very easy to make decisions rapidly. This allows a closely held corporation to adapt quickly to a changing market environment and to make radical decisions without needing to worry about getting enough votes from shareholders. These companies are also more insulated from market volatility. They are also hard to value, however, as it is difficult to attribute value to the shares that are not publicly traded. As a result, closely held corporations can lack access to capital when it is needed in a hurry.

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Organizing a closely held corporation requires filing articles of incorporation and working with a lawyer to lay out the terms. Usually people who are members of the minority shareholder group that controls the corporation must receive permission to sell their shares and may have limited options when it comes to who the shares can be sold to. This consolidates and maintains control among a small group of people, such as members of a family, ensuring that a closely held corporation remains closely held.

Closely held corporations may decide to reorganize and open themselves up to public trading. This should be done with care, because it is a difficult decision to reverse. Reasons for opening up might include wanting to access more capital than would otherwise be available or wanting to take advantage of a business opportunity. One notable thing about closely held corporations is that they tend to experience continuity of existence, staying strong in the market while publicly traded companies rise, fall, and are absorbed by other companies.

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Logicfest
Post 2

@Logicfest -- any of those scenarios could happen. If they do, it is time to sue the lawyer who incorporated the company. Most of these companies are put together so that the company has the first option to buy back any shares before they can be sold or transferred to outsiders.

The problem with that method is that it can be very expensive to buy out a shareholder who dies, leaves or wants to raise cash in a hurry. That is why closely held corporations need to keep some reserves around in case they need to buy shares and prevent them from being sold or transferred to outsiders.

Soulfox
Post 1

It seems these could be a real problem if one of the shareholders dies or leaves. If he or she dies, do the shares pass to their family members? It is possible to wind up with a partner you don't want? Similarly, what if a shareholder decides to leave the company? Could that person sell his shares or try to dissolve the company and split up the assets?

Here's another thing. What if a shareholder is running low on cash and decides to shell his shares to an outsider? Again, could the company be stuck with a shareholder that no one wants?

It just seems there are a lot of ways these arrangements could turn bad in a hurry.

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