Closely Held Shares

In a game of poker, you most likely keep your cards close to your chest. In the same way, investors own closely held shares of stock. They own these shares in (take a guess here) a closely held corporation.

Many times, these investors, who own just about all the shares available, are part of the management team, or are family members or large investors in the company. They trade their shares very infrequently, even though there is a minimum number of shares that have to be sold to “outsiders” in order to qualify as a closely held corporation.

There are several benefits to having shares in this type of company. Since few shares are ever sold, it is much harder for someone to pull off a hostile takeover. The stock price is usually based on the company’s fundamentals as opposed to the vagaries of general market forces. Plus, they don’t have to answer to a lot of external shareholders who might only be interested in short-term gains. The downside is that this structure makes it more difficult to raise additional capital through selling shares of stock, so the company will have to look for other sources of funds.

These types of corporations can come with tax benefits for shareholders as well. The company could apply to be an “S” corporation with the IRS where the shareholders pay taxes on their share of the profits, rather than the company as a whole paying taxes. If there is a loss, the shareholders could receive a tax deduction.