Advantages and Disadvantages of a Closely Held Corporation

July 12, 2022

A closely held corporation is a business owned by a small group of shareholders. This type of business is also called a closed corporation. Generally, for a corporation to be considered a closely held corporation, at least half of its shares must be under the ownership of no more than five people. Often, closely held corporations are family businesses. Closely held corporations are private corporations whose shares are not listed on a public stock exchange. Additionally, trading activities associated with closely held corporations are usually limited as most of the stock is held by people like private investors or family members.

If you are in the process of starting a new business, you might be considering a closely held corporation. But is this business structure right for you? In order to determine if a closely held corporation is the right business structure for you, review its advantages and disadvantages.

Advantages of a Closely Held Corporation

A closely held corporation can have several benefits. The following are some of the advantages of a closely held corporation;

Control

A closely held corporation allows the owners to have a huge say over the fate of their business. You will retain significant control as a majority owner in a closely held corporation.

Freedom

More control comes with more freedom. In a closely held corporation, there is the freedom to try new ideas and take risks. Also, depending on how a closely held corporation is structured, executives may not be required to explain how they spend every dollar or why they tried something that did not succeed.

Close Corporation Status

Usually, closed corporations can take advantage of statutory corporation rules. With a closely held corporation, you can obtain many of the benefits of incorporation while still being able to run your company without needing to meet certain corporate formalities.

Disadvantages of a Closely Held Corporation

Just as is the case with advantages, closely held corporations can have several disadvantages. Below are some of the disadvantages of a closely held corporation;

Raising Capital

It might be challenging for a closely held corporation to get money for expansion and growth. Usually, closely held corporations get funding from shareholders’ contributions and by generating profit. Using share equity to raise capital is challenging because the shares of a closed corporation are not on a public stock exchange for investors to purchase. However, if a closely held business has good revenues and a good reputation, it is possible to get loans.

Sale of Shares

It can be challenging for shareholders in a closely held corporation to sell their shares because shares are not on a public stock exchange. When shares are on a public stock exchange, it is easy to find a buyer since buyers are available throughout. Additionally, it can be challenging for a shareholder in a closely held business to sell their shares if the shareholder agreement contains restrictions on the transfer of shares. Most closed corporations have shareholder agreements with such restrictions.

More Legal Liability

With few shareholders, it means that each person shoulders more legal liability for the corporation’s actions.

Seek the Legal Help of an Experienced Santa Clara County Business Law Attorney

To learn more about the advantages and disadvantages of a closely held corporation, so you make the right decision, contact our business law attorneys at SAC Attorneys LLP.