What is a Closed Corporation?

Malcolm Tatum
Malcolm Tatum

Unlike a public company, a closed corporation is controlled by a few people who own all the voting stock and interest in the company. A family corporation is one common example of a closed corporation, although partnerships in which two or three business partners have complete control of the company would also qualify as a closed corporation. Many small businesses choose to operate with this model.

Often, more casual meetings take place before official meetings.
Often, more casual meetings take place before official meetings.

There are several advantages to closed corporations. Because the voting stock is in the control of a limited number of shareholders, the process of managing the overall operation is often much more simplistic. Persons who have control of a private company tend to also be intimately involved with the day to day operations, so there is no large gap between the goals of the owners and the methods employed by the managers of the corporation.

Another benefit of private companies is that it is often easier to come to consensus on issues that are facing the corporation. Since the control of the closed corporation is in the hands of a select few people, it is much easier to dialogue on how to best position the company for future performance. Often, a great deal of casual discussion can take place among the shareholders before any formal action is taken. The result is formal business meetings that can be conducted with a minimum of fuss and without taking a great deal of time to plan and execute a course of action.

The closed corporation remains one of the most common business models in the United States and many other nations. Because it is relatively easy to establish private companies and certainly easy to manage the closed corporation by keeping the financial interest limited to a select few people, the model is very attractive to entrepreneurs in many different fields. At the same time, it is not unusual for a closed corporation to reach a point where becoming a public company is necessary in order to sustain continued growth. When this happens, the small group of shareholders may choose to retain an investment in the reorganized corporation or sell off their shares at a profit to new investors.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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Discussion Comments

drtroubles

Does anyone know what kind of extra paperwork you need to fill out when you become a closed corporation?

letshearit

There are definitely some cons to becoming a closed corporation, there is another tax return to fill out, a lot more paperwork, and you end up losing any personal tax credits as every penny a corporation makes is taxed.

Be careful too, limited liability may not be as all encompassing as you think. If you're not already a successful business, loan offices are going to ask you for a personal guarantee on the money they give you.

MrSmirnov

This is a great article. As a small business owner you can really get some great benefits from being incorporated. Being a closed corporation offers things like limited liability and income splitting that can really help your business be more secure and lower taxes.

Becoming a corporation in Canada for example, is actually quite cheap. With all the lawyers fees and paperwork taken into consideration you are looking at around $500-$600 to go from a small business to incorporated.

For anyone considering it, definitely look up local laws because there are some pros and cons with any shift in business format.

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