Closely Held Corporations

Definition

A closely held corporation is a type of business entity that has a small number of shareholders, typically with close personal or business relationships. These corporations are characterized by their limited ownership and often have restrictions on the transfer of shares to outside parties.

5 Must Know Facts For Your Next Test

1. Closely held corporations often have a small number of shareholders, typically less than 35, who have close personal or business relationships.
2. The transfer of shares in a closely held corporation is usually restricted, with shareholders often required to obtain approval from the other owners before selling their shares.
3. Closely held corporations are typically not publicly traded, meaning their shares are not available for purchase on a public stock exchange.
4. The management and control of a closely held corporation is often concentrated among a small group of individuals, such as the founders or their family members.
5. Closely held corporations may offer certain tax advantages and increased privacy compared to publicly traded companies.

Review Questions

• Explain how the ownership structure of a closely held corporation differs from a publicly traded corporation.
  • The key difference between a closely held corporation and a publicly traded corporation is the ownership structure. Closely held corporations have a small number of shareholders, often with close personal or business relationships, and the transfer of shares is typically restricted. In contrast, publicly traded corporations have a large number of shareholders, and their shares are available for purchase on a public stock exchange. This difference in ownership structure leads to distinct governance structures, management practices, and access to capital markets between the two types of corporations.
• Analyze the potential advantages and disadvantages of a closely held corporation compared to a publicly traded corporation.
  • Closely held corporations may offer certain advantages, such as increased privacy, tax benefits, and concentrated control by a small group of owners. However, they may also face disadvantages, such as limited access to capital markets, reduced liquidity for shareholders, and potential conflicts among the owners. Publicly traded corporations, on the other hand, have greater access to capital and liquidity for shareholders, but they also face more regulatory oversight and disclosure requirements. The choice between a closely held or publicly traded structure depends on the specific goals, resources, and circumstances of the business.
• Evaluate the role of corporate governance in a closely held corporation and how it may differ from a publicly traded corporation.
  • Corporate governance in a closely held corporation is often more concentrated and informal compared to a publicly traded corporation. In a closely held corporation, the management and control are typically in the hands of a small group of individuals, such as the founders or their family members. This can lead to more efficient decision-making but also potential conflicts of interest or lack of independent oversight. In contrast, publicly traded corporations have a more formal corporate governance structure, with a board of directors, shareholder voting, and regulatory requirements. This structure aims to balance the interests of shareholders, management, and other stakeholders, but it can also introduce more complexity and bureaucracy. The appropriate corporate governance model depends on the specific needs and goals of the business, as well as the applicable legal and regulatory environment.

Related terms

Publicly Traded Corporation: A publicly traded corporation is a company that has issued securities, such as stocks or bonds, that are traded on a public stock exchange and are available for purchase by the general public.

Shareholder: A shareholder is an individual or entity that owns one or more shares of a corporation's stock, which represents an ownership interest in the company.

Corporate Governance:

Corporate governance refers to the system of rules, practices, and processes by which a corporation is directed and controlled, including the relationships among the shareholders, board of directors, and management.