As a business person or entrepreneur, you may have heard of the term “close corporation” but don’t quite understand what it means or how it could benefit or hinder your business. A close corporation is a type of legal entity that provides limited liability protection for shareholders while still maintaining the flexibility found in a general partnership. Read on to learn more about close corporations and how they can be used to benefit your business.
What Is a Close Corporation?
A close corporation is a form of business organization that combines the limited liability protection of a corporation with the flexibility of a partnership. This type of legal structure exists as an alternative to traditional corporate and LLC forms of business organization. As a close corporation, the owners are referred to as shareholders and are typically more closely connected to the business operations than owners of a traditional corporation would normally be. Shareholders in a close corporation are usually members of the same family or have a close association with each other. This type of business entity differs from a general partnership in that the liability of each shareholder is limited to the amount that they have invested in the business.
Benefits of a Close Corporation
The primary benefits of forming a close corporation are the limited liability protection it provides for shareholders and the increased flexibility it offers in terms of management structure. In addition, close corporations do not have to adhere to corporate formalities like other business entities, making it easier to manage day-to-day operations. Additionally, unlike a traditional corporation, taxes are passed through to the shareholders instead of the company itself, which can save on tax costs.
Drawbacks of a Close Corporation
As with any business structure, there are certain drawbacks to forming a close corporation. The primary drawbacks are that it is not easy to transfer shares and finding financing from outside investors can be difficult. Additionally, a close corporation may also face additional restrictions on the types of businesses it can pursue. As with all business structures, it’s important to research the options carefully to determine which structure is best for your business.
Conclusion
A close corporation is an attractive option for business owners who are looking for flexibility and protection of their personal assets, but it’s important to remember that there are certain drawbacks to this type of business structure. It’s important to understand the benefits and drawbacks before deciding if a close corporation is right for your business.