Closely held corporations, characterized by concentrated ownership, play a pivotal role in the business landscape. Explore the nuances of these corporations, their advantages, disadvantages, and notable examples like Hobby Lobby and Chick-fil-A.
Understanding closely held corporations
The term “closely held corporation” refers to a business where more than half of its stock is owned by a small group of individuals. The Internal Revenue Service (IRS) defines it as a non-personal service corporation with 50% of its outstanding stock owned by up to 5 individuals in the last six months of a tax year. These corporations can take various forms such as C corporations, S corporations, or LLCs.
Closely held corporations can have different business classifications, each with distinct implications. Under the S corporation classification, profits and losses are passed through to the owners. In contrast, under the C corporation classification, these aspects become the responsibility of the corporation itself.
Share prices and controlling shareholders
Closely held corporations face unique dynamics regarding share prices and controlling shareholders. With limited trading on the open market, share prices tend to be stable but less liquid. The majority shareholders often maintain long-term control, making it challenging for new investors to acquire significant stakes.
Due to the rarity of released shares, closely held corporations are less susceptible to hostile takeovers. This stability ensures that decisions align with the business’s best interests.
Pros and cons
Here is a list of the benefits and drawbacks to consider.
- Management retains full control of operations.
- Income is passed through to shareholders.
- Avoidance of annual information returns is possible.
- Greater influence over decision-making processes.
- Limited capital compared to public corporations.
- Restrictions on selling shares; shareholders may encounter difficulties.
- Management is bound by fiduciary duty and cannot make decisions for personal gain.
Examples of closely held corporations
Hobby Lobby, a major arts and crafts retailer, operates as a closely held corporation owned by David and Barbara Green. The company, guided by biblical principles, successfully argued against certain government mandates under the Religious Freedom Restoration Act.
Chick-fil-A, a renowned fast-food restaurant chain, remains family-owned and closely held. Operating under Christian principles, it refrains from trading on Sundays and has a private corporate structure.
Distinct characteristics of closely held corporations
While the previous section highlighted the general features of closely held corporations, let’s delve deeper into some distinctive characteristics that set them apart.
1. Limited disclosure requirements
Closely held corporations often benefit from reduced disclosure requirements compared to their publicly traded counterparts. With a smaller number of shareholders and less public scrutiny, these businesses may navigate regulatory landscapes more efficiently, avoiding extensive reporting obligations.
2. Personalized decision-making processes
One notable aspect of closely held corporations is the personalized decision-making process. With a limited number of major shareholders, decisions can be made swiftly and with a focus on the specific needs and goals of the business owners. This agility in decision-making is a significant advantage in adapting to changing market conditions.
Exploring notable cases of closely held corporations
Examining real-world examples provides a practical understanding of how closely held corporations operate and the impact of their structures on business decisions.
1. Mars, Incorporated
Mars, Incorporated, the global confectionery and pet care giant, is a classic example of a closely held corporation. Founded by the Mars family, the company remains private, allowing for long-term strategic planning without the pressure of quarterly earnings reports. The family’s commitment to maintaining control has contributed to the company’s stability and success over generations.
2. Koch Industries
Koch Industries, one of the largest privately-owned companies globally, operates as a closely held corporation. With a diverse range of businesses, including energy, manufacturing, and finance, Koch Industries exemplifies the flexibility and adaptability closely held corporations can achieve. The Koch family’s hands-on approach to management underscores the level of control and influence closely held corporations can retain.
In essence, closely held corporations are characterized by concentrated ownership, providing stability and control to management. However, they face limitations in raising capital and selling shares. Understanding the advantages and disadvantages is crucial for investors and business owners alike.
Frequently asked questions
What are the tax implications for closely held corporations?
Closely held corporations may have distinct tax implications based on their classification. S corporations pass profits and losses through to shareholders, while C corporations handle these aspects at the corporate level. Understanding the tax structure is crucial for both shareholders and the corporation itself.
Can closely held corporations issue dividends?
Issuing dividends in closely held corporations can be complex due to potential double taxation. Most closely held corporations avoid dividends, but the decision depends on the corporate structure, financial goals, and the preferences of major shareholders.
How do closely held corporations handle succession planning?
Succession planning in closely held corporations involves addressing the transition of leadership and ownership. With a limited number of shareholders often controlling the majority of the company, implementing effective succession plans is crucial for the long-term sustainability and growth of the business.
What factors should be considered when valuing shares in a closely held corporation?
Valuing shares in a closely held corporation can be challenging due to limited market activity. Factors such as the company’s financial performance, industry trends, and the influence of major shareholders play a significant role. Understanding these factors is essential for shareholders, potential investors, and business appraisers.
Are there regulatory differences for closely held corporations in different states?
Regulatory requirements for closely held corporations may vary by state. While the IRS provides federal guidelines, state-specific regulations can impact corporate governance, reporting obligations, and shareholder rights. It’s important for closely held corporations to be aware of and comply with both federal and state-level requirements.
- Closely held corporations have a small number of concentrated shareholders.
- Shares are often illiquid and dominated by company insiders.
- They are less vulnerable to hostile takeovers due to limited stock trading.
- For-profit closely held corporations, like Hobby Lobby, can opt out of certain mandates under the Religious Freedom Restoration Act[^1^].
- Understanding the advantages and disadvantages is crucial for investors and business owners alike.
View article sources
- closely held corporation — Law.Cornell
- Closely Held Corporations – Business and Commercial Law … – LibGuides
- Managing Closely Held Corporations: A Legal Guidebook – JSTOR