Close Corporation Advantages and Disadvantages
Close Corporations are valid in some states, like Wyoming. They are designed for small corporations which have a small number of stockholders usually having ties to one another through family relationships or friends and business partners.
What does a close corporation mean? Close corporations are special cases of regular business corporations electing to operate in a more informal manner likened to partnerships. Regular business corporations must conduct shareholder and director meetings, elect a board of directors, and provide shareholders with written proposals for any major corporate action to be voted on in the annual meetings.
A close corporation example would be family corporations that do not usually hold annual meetings because the family regularly makes decisions around the breakfast table. A Board of Directors is also not required if stated in the Articles of Incorporation, and so there is much less paperwork required for ongoing operations.
The Wyoming Close Corporation Law allows small corporations to forego many traditional corporate formalities.
Close Corporation General Characteristics
- Limited shareholders–corporations may not have more than 35 shareholders and still be a Close Corporation.
- Legal basis–Wyoming Statutory Close Corporation Supplement to the Wyoming Business Corporation Act, W.S. 17-17-101 et seq.
- Special action necessary–the Close Corporation law became effective on January 1, 1990. If you were incorporated before that date and you wish to transform your corporation into a close corporation, all shareholders must agree. You become a close corporation by so stating in your Articles of Incorporation or in an amendment to the Articles, that the corporation is a close corporation.
- Special action necessary–if you were incorporated after January 1, 1990, and you wish to transform your corporation to a close corporation, then only 2/3 of the shareholders must agree.
- Abbreviated governance–shareholders may agree in writing to treat the corporation as a partnership, operate without a board of directors, dispense with annual meetings, and make a shareholder agreement. (If you so choose this you need to let us know at the time of incorporation.)
Close Corporation Advantages
- Limited liability–the law says shareholders don’t have personal liability even though they relax corporate formalities in operations.
- Ease of operation–operates without pomp and circumstance required in regular corporations where hundreds of shareholders must receive information and vote.
- Cost of operation–relaxed corporate governance means lower legal, accounting, and administrative fees for lower total costs of operation.
- Deadlock prevention–provides access to court when shareholders are deadlocked and harm could befall the corporation through lack of action.
- Buy-out provisions–shareholders may buy out a deceased shareholder’s interest according to shareholder agreements.
Close Corporation Disadvantages
- Generally, we regard the “Close Corporation” as a highly advantageous and flexible vehicle for small and medium businesses. Possible disadvantages might be.
*Limited ownership transfer–share transfer is prohibited except in stated circumstances
*Fewer capital sources–only 35 shareholders may comprise a close corporation.
Close Corporation Tax Implications
- Close corporations are taxed the same as regular business corporations unless it opts for “S” tax treatment. See IRS Publication 542 and the instructions for Form 2553.