A closely held corporation is a business entity owned by a limited amount of people, typically less than 50 shareholders. This type of corporation is typically privately owned, meaning that ownership is not available on public markets and shares are not traded on exchanges.
The main implications of a closely held corporation are that these businesses have fewer legal requirements than their publicly owned counterparts and there is less potential for public scrutiny. It’s also important to note that many smaller businesses, including start-ups, are often defined as a closely held corporation.
The Pros of a Closely Held Corporation
For some companies, the primary benefits of a closely held corporation are focus and flexibility. As owners have control of the entity, there is a greater potential for shorter decision-making time and a quicker reaction to changing market conditions. Additionally, these smaller entities allow for private ownership of factors that wouldn’t normally be possible for public companies, which often have restrictions on who can purchase stock.
The Cons of a Closely Held Corporation
One of the main drawbacks of a closely held corporation is the potential for disputes amongst owners. With limited stock ownership and shareholder dynamics, conflict can arise quickly. Additionally, since these entities aren’t traded on public markets, they don’t provide any liquidity, which means that selling shares is often difficult. They also typically don’t generate as much publicity or receive as much press attention as public companies.
Modern Examples of Closely Held Corporations
Some examples of modern-day closely held corporations include Estee Lauder, the popular cosmetics company; Koch Industries, the conglomerate owned by the billionaire Koch brothers; and Spanx, the clothing and lingerie company owned by entrepreneur Sara Blakely.
Conclusion
Closely held corporations are an attractive option for many smaller businesses, as they provide a more flexible environment and are subject to fewer legal requirements than public companies. However, these entities can also expose owners to conflicts and lack of liquidity. Nonetheless, when managed responsibly, a closely held corporation can provide a strategic advantage for small business owners.