Closed Corporation

Yes, corporations close all the time for a variety of reasons, but we're not talking about why the laundromat by your house shut down. In legal terms, a closed corporation officially refers to a company that decides to operate more like a partnership with its shareholders.

To become a closed corporation, a company must first meet certain state requirements, such as not having more than 30-35 shareholders and not being able to make a public offering of its stock. Usually a smaller business might decide to become a closed corporation to avoid such requirements as having formal annual meetings. However, in this “partnership,” shareholders have a lot more power, such as being able to override the executives’ decisions.

Shareholders also have a high degree of control over other shareholders who might want to sell their shares to “outsiders.” Most closed corporation shareholder agreements state that current shareholders have the right of first refusal for any sale or transfer of shares. Another benefit to being a shareholder in a closed corporation is that your personal liability protection is strong, since the company doesn’t have to follow all the formalities of an “open” corporation and won’t get in trouble if they don’t follow them.

Not all states allow closed corporations. But even if you physically set up your business in North Carolina, for example, you can still incorporate in a state that does allow them such as South Carolina or the “in” place to incorporate, Delaware.