Do you know you can incorporate the benefits of a corporation and partnership together? Yes, you read it right! With a close corporation, the directors and shareholders can operate their business much like a partnership and gain a close corporation status without the strict formalities required in the operation of standard corporations.
What is a close corporation?
A close corporation is a business that is set up using a corporate business structure, but all the shares are usually held by the partners closely associated with the business. Incorporating in a closed corporation allows a partnership to benefit from liability protection without effectively changing the way a business operates. A close corporation is usually exempted from many requirements of other corporations such as holding annual meetings and having a board of directors. It is a state-specific statutory entity, usually built to lessen the focus on taxation and the corporate formalities in operation.
Requirements for Close Corporations
To be eligible for the close corporation status, the corporations need to fulfill the following requirements:
- It needs to be approved in the state of organization.
- It cannot have more than 30-35 shareholders.
- It cannot list in any stock exchange or make a public offering of its stock.
- Shareholders need to agree unanimously to get a close corporation status.
- A written shareholders’ agreement must be drafted, governing the affairs of the corporation.
In most states, the name of the close corporation must be followed by the capital letters “CC”.
How Can Companies Incorporate Close Corporation
A close corporation is a private corporation with a limited number of shareholders. There are some particular steps that a business needs to follow to get their “Close Corporation” status.
- Step 1: Choose a state in which you want your business to incorporate. You can set up the company where it is headquartered, or another state. For this, you need to evaluate the costs of incorporating in another state along with the state’s tax structure, business laws, advantages, and disadvantages.
- Step 2: After deciding the state, check the incorporating requirements for the close corporation. Every state has their special legal restrictions on how a close corporation can be formed. Usually, these provisions need that the corporation state in its articles of incorporation is close, the number of shareholders is limited to 30 to 45 people. Also, there are some restrictions on the transfer of shares.
- Step 3: Check the name availability as you can not have the same name as another incorporated business. You can either check it on your own at the secretary of state’s website, or Startupr can help you in checking the name availability for your company.
- Step 4: Choose a registered agent, he will receive all the legal papers that involve business and will inform you about all the important steps and decisions required.
- Step 5: Complete the articles of incorporation. You can do it on your own, but if you want it to be done professionally and under expertise, you can hire Startupr. We will complete all the process in a professional manner.
- Step 6: Drafting a shareholder agreement is a must. You can consult an experienced attorney for this. This agreement needs to be included with the articles of incorporation, depending on the close corporation requirements of the incorporating state.
- Step 7: File the articles with the incorporating state. Generally, the articles are filed with the incorporating state’s secretary of state, or Startupr can help you with this.
Advantages of Close Corporation
Lower Costs of Operation
To set up a close corporation, there are a few reporting requirements, resulting in the overall costs of accounting, administrative fees, and legal counsel much more inexpensive and thus saving thousands of dollars annually.
Since a few corporate formalities are required for close corporations, no personal liability for the debts of the corporation is faced by the shareholders.
A close corporation does not commit to submit information about the problems that may impact the company and expect a vote by a specific date. In some cases, the changes may be analyzed without the requirement of a meeting.
The Buyout of Stock
The agreement made by the shareholders has clear and explicit directions for buying the back stock for the shareholders who exits the corporation for any reason, shareholders who are deceased or to manage the stock transfer in case of divorce. This is done basically to avoid any outsiders to become part of the company.
Since the number of shareholders is less, and the company’s operations are dependent on the shareholder’s agreement, there are only a few reporting requirements.
Disadvantages of Close Corporation
Limited options for capitalization
Unlike the other business types, the capital of a close corporation comes only from the owners of the corporation. Due to this, it can be difficult for the company to expand. Also, since there is no publicly traded stock, the owners cannot ask about funds from other people.
Limited options for divesting shares
The shareholder agreement will include explicit restrictions on divesting shares. In most of the cases, if any shareholder wants to sell the shares, he can sell them to current shareholders. This puts restrictions on the earnings of the shareholder on the sale and restricts the number of people who may buy the shares.
Close Corporation taxation
Until and unless the owners and shareholders decide to get the S Corporation status from the IRS, the close corporation is taxed as a C Corporation. It means the income of the corporation is subject to double taxation.
Limited Availability in States
Close corporations are not accessible in all states. But yes, you can always incorporate in a state that recognizes the close corporations. Keep in mind that our corporation will be governed by the corporate law in the state of the charter.
Shareholders have increased responsibility and participation. All the responsibility is solely on them as they are liable for every decision.