What is a Close Corporation?

The Delaware Close Corporation

Not every corporation is built for broad ownership or outside investment. Some are designed to keep decision-making and ownership within a small, familiar group. A Delaware close corporation offers this more private approach while still preserving the structure and liability protections of a corporation.

A close, or "closely held," corporation is a type of venture where the shareholders, directors, and officers are typically the same people, and where all parties desire to remain a small, tight-knit group. Unlike a public corporation, a close corporation does not sell shares on a public stock exchange. Ownership is usually tightly controlled (restricted to no more than 30 shareholders), and shareholders may place restrictions on who can buy or receive shares.

Close corporations are commonly used by small businesses that want the liability protection and structure of a corporation while keeping ownership and decision-making within a limited group. In many cases, shareholders are also involved in managing the business directly, which can make operations more flexible than in a traditional corporation with a separate board and officers.

Benefits of a Close Corporation

Business owners may choose to form a Delaware close corporation when they want the legal protections of a corporation while keeping ownership and control within a small group. A few of the most popular benefits of a close corporation include:

Limited liability protection – Like other corporations, a close corporation generally helps protect shareholders’ personal assets from the debts and liabilities of the business.
Control over ownership – Because shares are not publicly traded and transfer restrictions are required, owners can limit who may become a shareholder.
Flexible management structure – A Delaware close corporation may be managed more like a partnership, allowing shareholders to take a direct role in business decisions.
Fewer outside influences – Since ownership is limited to a small group, shareholders may avoid pressure from public investors or unrelated third parties.
Tax versatility – A close corporation isn't a specific "tax type" (like an 彩虹频道 is), so it offers choices. Many close corporations elect S-Corp status with the IRS, allowing for pass-through taxation

Close Corporation Requirements

To qualify as a Delaware close corporation, the corporation’s certificate of incorporation must include specific provisions required under Delaware law. In addition to the standard provisions required for a Delaware corporation, the certificate must state that the corporation’s issued stock will be held by no more than a specified number of record stockholders, which cannot exceed 30.

The certificate must also provide that all issued stock is subject to one or more transfer restrictions permitted under Delaware law. These restrictions help keep ownership within the approved group of stockholders and may limit or condition how shares can be sold, assigned, or otherwise transferred.

Furthermore, a Delaware close corporation may not make a public offering of its stock. This means its shares are not publicly traded or offered to the general public. If these requirements are breached and not properly corrected, the corporation may lose its close corporation status.

Close Corporation Management

A Delaware close corporation generally has a more flexible management structure than a traditional corporation. In many corporations, shareholders elect a board of directors, and the board oversees major business decisions. However, in a close corporation, the shareholders are usually the same people who serve as directors, officers, or managers of the business.

Delaware close corporations can also use shareholder agreements that affect how the business is managed. This gives owners more flexibility to decide how profits are divided, how officers are chosen, whether shareholders will be employed by the company, and how disputes will be resolved.

Close Corporation Tax Treatment

A Delaware close corporation is taxed like a corporation for federal tax purposes. By default, it is generally treated as a C corporation, meaning the corporation is subject to double taxation. This means that the corporation will pay tax on its profits, while shareholders also need to pay taxes on dividends they receive. However, if the corporation qualifies, it may file IRS Form 2553 to elect S corporation status. This generally allows income, losses, deductions, and credits to pass through to shareholders, helping avoid corporate-level federal income tax.

Owners should consult a tax professional before choosing a tax structure.

How to Form a Close Corporation

To form a Delaware close corporation, the process is similar to that of a general corporation. The legal document that is filed with the Delaware Division of Corporations is called a Certificate of Incorporation and has an additional article that states it is a close corporation. Generally, the steps are as follows:

Choose a corporate name
Prepare the Certificate of Incorporation
File with the Delaware Division of Corporations
Create bylaws or a shareholder agreement
Issue stock certificates

History of the Close Corporation

When corporations were first introduced in Delaware in 1875, you had to have at least three people working together to form a corporation. The whole idea of a single-person corporation was not even envisioned by the early lawmakers. But entrepreneurs demanded control, so they would include their lawyer and perhaps a secretary to be the stand-in shareholders to meet the requirement.

The law was also very strict about the separation between the three tiers of power in a corporation: the Shareholders, the Directors, and the Officers. It was unthinkable that one person could be all three at once. Every year, the company would have to have a Shareholders’ meeting, with a few Board of Directors meetings throughout the year, to direct the Officers of the company on the day-to-day affairs.

Delaware, as usual, was the first state to respond to this need for control, desire to own, run, and operate a company by a single person or a small, tight-knit group. This is the “Close” or “Closely Held Company."

Close Corporation FAQs

Does a Close Corporation have Shareholders?

Yes. The structure of the close corporation is designed to allow for more personal management to maintain control within a small group of people. In Delaware, the maximum number of shareholders is 30. This is much lower than what is allowed in a general corporation, where there is no limit to the number of shareholders.

Can a Close Corporation Be an S-Corp?

Yes. An S corporation election can allow income, losses, deductions, and credits to pass through to shareholders. A close corporation can elect to be treated as an S corporation by filing IRS Form 2553. Here is more on the tax benefits of an S-Corp.

Is a close corporation good for small businesses?

A close corporation can be a great fit for small businesses that want liability protection while keeping ownership and control within a limited group. It may work especially well for family businesses, founder-owned companies, or closely held ventures where shareholders are active in management and do not plan to raise money publicly.

What happens if a shareholder wants to sell their shares?

Close corporations often have restrictions in place that require shareholders to offer their shares to existing shareholders or follow buy-sell agreements before selling to outsiders. These buy-sell agreements usually dictate how shares will be handled, such as requiring them to be sold back to the corporation or remaining shareholders.

Form a Close Corporation with HBS

If you’re excited to form a business with a tight-knit group of leaders, a Delaware Close Corporation might be right for you. You can form your own Delaware Close Corporation with Harvard Business Services, Inc. Our team has been forming businesses since 1981, and we’re happy to provide support as you begin your journey. Form a Close Corporation online today.

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The Delaware Close Corporation