According to the IRS, a closely held corporation limits its shareholders to just a few individuals, often less than 35. Generally, at least half the shares of a closely held business must be under the ownership of no more than five people.
Review the pros and cons of this business structure if you are in the process of establishing a new enterprise.
Advantages of a closely held corporation
Closely held businesses have fewer regulatory requirements than other corporate entities. For example, you do not have to hold an annual meeting or establish a board of directors.
As a majority owner in this type of company, you retain a significant amount of control. Conversely, issuing more stock shares dilutes your control, potentially putting key aspects of the company in the hands of outside shareholders.
Drawbacks of a closely held corporation
If you incorporate your business, you could end up paying twice the taxes you would as a different type of entity. However, you can potentially bypass this issue by selecting optional S corp taxation. If you eventually plan for your business to go public, however, you cannot do so as a closely held corporation. You also cannot use this structure for a service-based enterprise.
In addition, with fewer shareholders, each person shoulders more legal liability for the actions of the company. Having outside managers can help absolve some of this responsibility compared to acting as both a manager and a shareholder.
Understanding these pros and cons can help you decide on the right structure for your business.