Sometimes referred to as a Closely Held Corporation and is very similar to a General Stock Corporation. This type of corporate entity is designed for companies where the shareholders, directors and officers are the same group of people, and they desire to remain a small close group, without a formal board of directors making all the decisions. The shareholders manage everything.
Shares in a Close Corporation have restrictions. The stock is not freely traded, and is held by only a few shareholders. Delaware law restricts shareholders to a maximum of 30. The company and shareholders have a right of first refusal to buy shares if any shareholder decides to sell, meaning the corporation must first offer the shares to existing shareholders before selling to new people outside the group. The group of shareholders may also impose other restrictions in their bylaws on the sale, transfer or disposition of the stock.
Also, the shareholders have the ability to elect “S” Corporation status with the IRS so that taxes are passed to the shareholders rather than the corporation. Even though the tax liability “flows through” to the shareholders, the corporation is required to file a tax return. This effectively eliminates the “double taxation” of General Stock corporations.
Features of a Close Corporation
- Designed for a small, cohesive group
- Restricted to no more than 30 shareholders
- Corporation cannot become publicly traded
- Eliminates management by a Board of Directors
- Shareholders assume the responsibilities of the Directors and directly manage the company
- Restrictions on the sale and transfer of stock
- Provisional director may be appointed by the Delaware Chancery Court to settle disputes
- May elect Subchapter S if all qualifications are met