Business Law

Starting or Buying Closely Held Businesses

If you are starting or buying a small business, you may be interested in finding out more about closely held businesses. A closely held business can have the form of a small and closely held corporation. In a closely held corporation, the shares are owned by a small number of shareholders, and the shares are not publicly traded. Closely held corporations have their own characteristics.

Form

A closely held business that is a small corporation is owned by shareholders of the corporation. The board of directors manages the corporation, and the directors have duties of loyalty and disclosure to the shareholders. The board of directors delegates the day-to-day running of the corporation to the corporation's officers. Officers follow the policies of the board. Shareholders, in turn, can elect and remove the directors, and can approve (or disapprove) those actions of the board that affect the fundamental character of the corporation or of the securities held by the shareholders. The board, the officers and the shareholders all have rights and duties as set out in state laws.

Attributes

Closely held corporations have certain attributes or characteristics. They have:

  • A small number of stockholders
  • No ready market for the corporate stock
  • Substantial majority stockholder participation in the management, direction and operations of the corporation

Shareholders invest in small corporations with the expectation that they will actively participate in the operations of the business. They often use a substantial amount of their personal assets to acquire stock and a seat on the board of directors or employment as a corporate officer.

Advantages

There are advantages to having a closely held corporation, such as:

  • Limited liability. If your corporation is properly set up, you can limit your liability for debts of the corporation to the extent of the assets owned by the corporation. You can avoid personal liability for corporate debts by not personally guaranteeing any loans.
  • Longevity. A small corporation does not end with the death of the owners. When the shareholders die, their shares are distributed as provided in the corporation's by-laws and by the shareholders' last wills. The business continues after the death of the original owners.

Setting Up a Small Corporation

You should seek the services of an attorney if you are interested in setting up a small corporation. An attorney can help you to decide:

  • Whether to set up a corporation in the first place
  • How to deal with the issue of majority control of the corporation
  • Whether to restrict the sale of shares to certain people
  • What kind of shareholder agreements you might need
  • How to handle dissension and deadlock among shareholders

You will need incorporation documents, such as a charter, bylaws, meeting minutes and subscription agreements. You will need to choose a name for your corporation and register your corporation with your state's secretary of state's office. You will also need to know what kinds of taxes you will have to pay, such as corporate income tax, quarterly estimated taxes, unemployment taxes and property taxes. A small business attorney can help you with these things, as well as with anything else that you need to know about your new business.

Questions for Your Attorney

  • Who is responsible for creating the policies of a closely held corporation?
  • Can shareholders of closely held corporation be officers of the same corporation?
  • Does a small corporation end with the death of its original owners?
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