What is a Closely Held Corporation?
A Closely Held Corporation refers to a type of business entity in the United States characterized by having a limited number of stockholders, usually family members or a small group of investors. Unlike widely-held public corporations where stock is freely traded on open markets, shares in a closely held corporation are not generally available on public exchanges, leading to fewer transactions and less liquidity.
Key Characteristics
Limited Shareholders
Typically, these corporations are owned by fewer than 35 shareholders. The close-knit nature of the ownership means decisions can be made quickly, without the myriad of approvals required in larger public companies.
Restricted Share Trading
Shares of a closely held corporation are not regularly bought and sold on public exchanges. Any sale or transfer of shares is often subject to restrictions outlined in shareholder agreements, keeping the company’s control within a small group.
Privacy and Control
Closely held corporations often enjoy greater privacy than their publicly traded counterparts, as they are not required to disclose as much information under securities laws. This can be a double-edged sword, providing both freedom from public scrutiny and a cloak of secrecy around financial decisions.
Financial Implications
Managing a closely held corporation can be financially advantageous, allowing for centralized control and potentially lower capital costs. However, the limited market for its shares can pose challenges in attracting investment and valuing the business accurately.
Etymology and Usage
Derived from the notion of being “held” by a close group, the term illustrates both the relationship between the shareholders and the nature of the company’s stock restrictions.
Related Terms
- Shareholder Agreement: A contract among the shareholders of a corporation detailing rights and obligations.
- Privately Held Company: A broader term that includes any company not publicly traded, whether closely held or not.
- Liquidity: The ease with which assets can be converted to cash. In the context of closely held corporations, liquidity is generally low.
- Public Corporation: Contrasts with a closely held corporation, typically having many shareholders and traded openly on stock markets.
Further Reading
To deepen your understanding of closely held corporations, and their role in the business and financial world, consider diving into the following books:
- “Corporate Governance in Closely Held Corporations” by Robert B. Thompson and Carter G. Bishop: a guide to managing legal and financial responsibilities.
- “The Dynamics of Family Business: Building Trust and Resolving Conflict” by Lorna Collins: offering insights into managing the unique challenges in family-held corporations.
Remember, in the world of closely held corporations, it’s not just about who you know, but how many shares you control. So, keep your friends close, and your shareholders closer!
