You may have heard the term, ‘closed company’ before, this often refers to a close corporation. A close corporation is a business structure for a corporation that is utilized by small companies where the shares are held by a select few individuals who are generally closely associated with the business. There is no special filing or designation for creating a close corporation, it is merely a corporation that has elected, typically through a Texas Shareholder Agreement to be closely held and adhere to additional internal structure rules. A close corporation allows a corporation to retain the limited liability of a corp. with the management style benefits of a partnership. There are fewer formalities for a close corporation and allow greater control for the few shareholders.
The shares of a close corporation are not available for exchange on any public market, they are transferable by private transactions. The restriction of transferring shares places a limitation on the liquidity of the corporation, even though the company can be bought and sold. The shares are owned by a limited number of people and often has strict transfer restrictions. Generally, the close corporation will also have buy/sell provisions that allow the existing owners first rights of refusal for shares offered for sale.
Companies that expect to raise venture capital or offer securities should not become a close corporation. The close corporation is for those companies that are small, owned by few shareholders and does not need capital injection from offering shares. The ownership of a close corporation is often held by those involved with the day to day operations. Management decisions vested in few people intimately involved with the company enables fast, accurate decisions to be made. One disadvantage of this corporate mobility is the stalemate that can occur when owners disagree on a decision, sometimes leading to corporate gridlock. Having a good shareholder’s agreement is essential for every close corporation.
In Texas, a close corporation must choose to designate themselves as such in the articles of incorporation. It usually contains a sentence stating “This is a close corporation.” Texas also allows a wide range of corporate management, similar to an LLC. The close corporation in Texas can replace many of the default statutory provisions with a well drafted shareholders agreement.
While close corporations can be governed and setup in a similar manner as a limited liability company, there are some important distinctions. Both an LLC and a close corporation will limit your personal liability from company actions since they are both separate legal entities from your person. In general, close corporations have more restrictions and paperwork requirements but offer greater protection of the business owners’ assets. LLCs are simpler to set up and may be better for businesses looking to raise capital or have multiple members with different management strategies. Ultimately, choosing between a close corporation and LLC will depend on the goals of the business.
Corporate governance is an important consideration for any small business, be sure to call Reidel Law Firm for a free consultation on your options and what may be best for yourself and business. Use the form below or call us at (832) 510-3292.