Understanding the Close Corporation

Specifically, there is a cap on the number of people that can have an ownership stake, to wit, the number of shareholders. This number varies from state to state, so you will have to look it up. The secretary of state often has a website and provides such information.

There are many advantages to a close corporation. For small business, one of the best is that corporate formalities are often disregarded, meaning you don’t have to hold board meetings and such. Another advantage is the ability to restrict share sales, which lets you avoid a situation where a shareholder sells their shares to someone you don’t know and don’t want in the business.

Importantly, you must understand that the close corporation designation is not allowed in every state. States such as California allow for their formation, while other states do not. Assuming you can form one in your state, you need to read up on the rules applicable in your state. Generally, you should find that there is a limit on the number of shareholders. This usually isn’t too much of a problem because the cap is usually at 30 or more shareholders. This means most small businesses can become close corporations without any problem.

A secondary issue you are going to have to address is the formation process. The close corporation designation is one that is made with the state, specifically the Secretary of State. The Secretary usually has very specific rules about how the designation has to be done. Obviously, such rules differ from state to state, but you often have to put the designation in the original articles of incorporation in one form or another. Again, you should read up on the specific requirements for your state.

Close corporation can be a great way for the little guy to benefit from relaxed corporate rules, while gaining the liability and debt protection afforded to huge multi-national corporations. If you are considering incorporating, this might just be the perfect choice for your business.