To understand what a “close corporation” or “closed corporation” is, you want to look first at the way that traditional corporations govern themselves.
Note: Close or closed corporations are also sometimes called family corporations.
With a traditional corporation, state laws and the corporate by-laws usually require annual stockholder’s meetings where a board of directors gets elected. The board of directors, which should meet regularly–perhaps quarterly or maybe even monthly–elects and oversees corporate officers including a president, treasurer, secretary, vice presidents, and so forth. These corporate officers then run the business on a day to day basis.
This governance structure works pretty darn well for a large corporation with outside shareholders who aren’t involved in running the business. And, thankfully, the governance structure provides decent protections for the shareholders in many cases. Often, the corporation needs to give several weeks written notice before meetings. Extensive notes should document what goes on at stockholder meetings and at board of directors meetings. State laws may even require specified numbers of directors and officers.
But think about the situation where you, a single guy or gal, sets up a one-shareholder corporation. Does it really make sense for you (the single shareholder) to have an annual shareholder’s meeting where you elect, er, yourself as the sole director on the one-person board of directors. And then in your capacity as the one-man board of directors you elect yourself as the president, treasurer, secretary, chief bottle-washer and cook? Clearly not.
To deal with this level of absurdity, a handful of states have created the option of “close corporations” or “closed corporations.” With a close or closed corporation, the rules are simplified so that (as a generalization) a one-shareholder corporation or a husband-and-wife corporation or family corporation doesn’t have to pretend they need the same checks and balances that larger corporation with passive shareholders does.
Note: At the time I’m writing this, the list of states that allow close corporations or closed corporations includes Alabama, Arizona, Delaware, Georgia, Illinois, Kansas, Maryland, Missouri , Montana, Nevada, Pennsylvania, South Carolina, Texas Vermont and Wyoming. Note that Washington state does not provide a close or closed or family corporation.
You create a closed corporation in roughly the same way that you create a regular corporation. Typically, your articles of incorporation identify the corporation you’re creating as a closed or close corporation. State law may restrict you to a small number of shareholders. Finally, with a closed corporation, typically the shareholders need to all agree beforehand to use the close corporation rules. (This makes sense if you think about: Essentially, what “closes” a corporation is the absence of some of the more traditional checks, balances and controls.)
One quick editorial comment: Probably people looking at the closed corporation option should also consider using a limited liability company. Limited liability companies deliver the same “simplicity” benefit as a close corporation. In addition, a limited liability company often provides for tax benefits that a close corporation doesn’t.
And a final clarification: the phrase “closely-held” corporation isn’t the same thing as a closed or close corporation. A closely-held corporation is usually a private corporation where the shares are owned by a small number of shareholders. In essence, a closely-held private corporation is sort of the opposite of a large public corporation.