An organization that is privately owned and run by a small group of people is referred to as a close corporation, also known as a closely held corporation. A small number of shareholders, who are frequently family members, friends, or business partners, control the ownership of a close corporation. Small firms who wish to keep control over their operations and prevent the public scrutiny that comes with being a publicly traded company frequently choose this type of corporation.
Depending on the shareholders’ choice of tax classification, a close corporation may be set up as either a C corporation or a S corporation. An S corporation is a pass-through business that enables the revenues and losses to be passed through to the shareholders and reported on their personal tax returns, as opposed to a close corporation (C corp) that is taxed separately from its owners. The number of shareholders, the nature of the business, and the owners’ tax objectives will all influence the tax categorization decision.
It is crucial to understand that a limited liability company (LLC) and a close corporation are not the same thing. Although both kinds of businesses provide their owners with some limited liability protection, a close company is subject to additional legal requirements and formalities. For instance, an LLC is not required to have a formal shareholder agreement outlining each shareholder’s rights and obligations, whereas a close corporation is.
A close corporation must adhere to the same fundamental corporate formalities as any other corporation in order to operate legally, including conducting regular board meetings and maintaining proper financial records. However, there might be fewer formalities needed than in a bigger, publicly traded corporation because the shareholders of a close corporation are frequently intimately involved in the day-to-day management of the business.
One of the key advantages of a close corporation is that it enables the owners to keep control of the business and make decisions swiftly without having to seek the input of a sizable number of shareholders. It may also be simpler to manage business operations and uphold a consistent corporate vision when ownership is restricted to a small number of individuals. Another advantage of establishing a close firm as a S corporation is the potential for tax savings for the shareholders.
As a sort of corporate company, a close corporation is privately owned and run by a limited number of stockholders. Depending on the owners’ tax objectives, it can be set up as a C corporation or a S corporation. Even if a close corporation has many advantages, it is crucial to follow all legal procedures and criteria to keep its identity as a distinct legal entity and shield the owners from personal liability.