Definition
A closed corporation, also known as a closely held corporation, is a company whose shares are held by a select few individuals who are usually closely associated with the business. The stock in these corporations is not sold publicly and it’s often held by family members, friends, or employees. They have a limited number of shareholders and their stock is not traded on public exchanges.
Key Takeaways
- A Closed Corporation, also known as a closely held corporation, is a type of business structure in which the ownership is confined to a limited number of shareholders, typically family members or a small group of investors.
- Unlike publicly traded companies, shares of a closed corporation are not sold on open markets, which means its stock is not available for public trading or purchase.
- This type of corporate model provides the shareholders significant control over corporate decisions, but it also limits the ability to raise capital as they can’t sell stocks to the public.
Importance
A closed corporation is significant in finance due to its unique structure that lends itself to the privately-held nature of such corporations. With its shares not freely traded on public exchanges, a closed corporation keeps the company’s control within a limited group of people, usually founders or family.
This provides an enhanced level of control over business decisions, strategy, and profitability. Being free from the pressures of public shareholders, a closed corporation can focus on long-term goals rather than short-term market expectations.
Yet, the closed corporation model also bears financial implications, particularly in terms of limitations on the liquidity of the shares and potential challenges in attracting external investment. Thus, understanding the concept is fundamental in finance especially when making capital structure decisions, evaluating investment opportunities, or advising clients in private equity or family businesses.
Explanation
A closed corporation, also known as a privately held company, serves a significant role in the business world, especially when it comes to retaining control over a business’s strategic direction. This type of corporation allows a small number of owners, typically founders, family members, or employees, to maintain independent control without the influence of a larger pool of shareholders that you would normally find in a publicly traded corporation.
This allows the business to operate and make decisions without having to adhere to shareholder pressure, therefore, providing the company with a greater degree of operational flexibility. In terms of usage, a closed corporation often serves as a means for a family-owned business or entrepreneurial start-up to secure funding without surrendering control to outside investors.
By limiting share distributions to only a select group of people, these corporations can ensure that important decisions are made by those who have a deep understanding and vested interest in the company’s long term success. Further, closed corporations often streamline decision-making processes and allow for more privacy in business operations, as they are typically exempt from some of the rigorous reporting requirements imposed on publicly traded companies.
Examples of Closed Corporation
Mars, Inc.: Mars, Inc. is one of the largest private and closed corporations in the world. They produce many beloved household confectionery such as Snickers, Twix and M&Ms. As a closed corporation, Mars Inc. is not required to release extensive financial information or disclose all of their business operations to the public.
Koch Industries: Koch Industries is another large, privately-held company headquartered in the US. The company operates in various industries such as manufacturing, refining, and distribution. Because it is a closed corporation, it has been able to maintain its business strategies and financial matters without public scrutiny.
Cargill Inc.: As the largest private corporation in the United States, Cargill operates in various industries including agricultural, finance, and industrial sectors. They choose to remain a closed corporation, which allows their financial records, operational strategies, and other corporate matters to remain private. This also means that it’s more difficult for outside investors to purchase a stake in the company.
FAQ for Closed Corporation
What is a Closed Corporation?
A Closed Corporation is a type of company whose shares are held by a select group of people. These shares cannot be sold or transferred to the general public without the fulfillment of certain conditions.
Is it possible to buy stocks in a Closed Corporation?
Yes, you can buy stocks in a Closed Corporation, but it is less accessible compared to companies that publicly trade stocks. Depending on the corporation’s agreement, an already existing shareholder may have the first right of refusal before the shares can be sold to a new stockholder.
How is a Closed Corporation different from an Open Corporation?
In an Open Corporation, stocks are freely traded in public markets. Anyone can buy these stocks. Unlike a Closed Corporation, an Open Corporation has more strict rules and regulations set by the government to protect public investors.
What are the advantages of a Closed Corporation?
Owners of Closed Corporations have more control over the company. They choose who to sell their ownership stakes to, maintain confidentiality, and are able to bypass many formalities which are typically mandated by a larger publicly traded company.
What are the disadvantages of a Closed Corporation?
Closed Corporations struggle to raise capital as they cannot sell their stocks as openly and quickly as Open Corporations. Also, the lack of stock liquidity can pose problems for shareholders wanting to sell their stocks.
Related Entrepreneurship Terms
- Private Ownership
- Shareholder Restrictions
- Non-Public Trading
- Book Value
- Buy-Sell Agreement
Sources for More Information
- Investopedia: A trusted source for information and explanations of various finance and investment terms, including a closed corporation.
- Inc.: Provides information about starting and managing businesses, including a breakdown of corporation models and what closed corporation means.
- Entrepreneur: Offers a comprehensive overview of different types of businesses, including closed corporations.
- The Balance: A personal finance website covering many topics from credit card information to all types of corporations including closed corporation.
