What is a Closely Held Corporation?

//What is a Closely Held Corporation?
What is a Closely Held Corporation? 2017-10-01T07:30:10+00:00

Definition: A closely held corporation, also called a closed corporation, is a corporation is owned by a small, select group of investors. These are often times family businesses. Trading activity associated with these companies tends to be limited, as a majority of the stock is held by individuals such as family members or private investors.

What Does Closely Held Corporation Mean?

What is the definition of closely held corporation? Typically, there tends to be very little in the form of stock trading activity with the shares of a closed corporation, as the shareholders of the corporation tend to hold investments of this variety for an extended period of time. The lower trading volume, coupled with the small pool of shareholders, typically generates long-term stability as it relates to the stock price per share.

What are the pros and cons of a closely-held corporation? Given the closed nature of these companies, strict tax laws have been developed to ensure closely-held companies do not act as tax shelters for the small group of shareholders. The two most significant tax rules applied to closely held companies limit the number of shareholders owning more than 50% of the value of all stock to five individuals. The companies also cannot be a personal service organizations.

Example

While there a significant number of closely held corporations in the United States, one of the best examples is Hobby Lobby. This privately held family owned business operates in the arts and crafts industry. It’s one of the biggest hobby supply stores in the country.

Stock associated with Hobby Lobby is not traded publicly; rather the stock has been issued to a small group of family members who operate the business as a privately held S-Corporation.

All large, publicly traded companies started out this way. For example, Ford Motors was originally owned by Henry Ford himself until he took on other investors and eventually took the company public.

Another example of a large family owned business is Koch Industries. Valued at more than $60B, Koch Industries is owned by the Koch family.

Summary Definition

Define Closely Held Corporation: a corporation that has issued stock that is only held by a small, select group of investors.