Closely Held Corporation: Definition, Types, And Examples
Published: October 28, 2023
Learn about closely held corporations in finance, including their definition, types, and examples, in this comprehensive guide.
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Finance: Understanding Closely Held Corporations
When it comes to business structures, one term that frequently comes up is the closely held corporation. But what exactly is a closely held corporation, and how does it differ from other types of businesses? In this blog post, we will dive into the definition, types, and examples of closely held corporations to help you gain a better understanding of this unique business entity.
- A closely held corporation is a type of business entity where the ownership is held by a small group of individuals or a single family.
- Closely held corporations often have a more personal and close-knit relationship between shareholders, fostering a sense of family and camaraderie.
What is a Closely Held Corporation?
A closely held corporation, also known as a closed corporation or private corporation, is a business entity in which the ownership is held by a small group of individuals or a single family. In most cases, closely held corporations have a limited number of shareholders, and their shares are not traded on a public stock exchange.
Unlike publicly traded corporations, closely held corporations typically have a more personal and close-knit relationship between shareholders. This can foster a sense of family and camaraderie among the owners, leading to stronger decision-making processes and long-term business relationships.
Types of Closely Held Corporations
There are two main types of closely held corporations: C corporations and S corporations. Let’s take a closer look at each:
1. C Corporations
C corporations are the default structure for closely held corporations. This type of corporation allows for an unlimited number of shareholders and offers limited liability protection to its owners. C corporations are separate legal entities from their shareholders, meaning that the owners’ personal assets are generally protected from the corporation’s debts and liabilities.
With a C corporation, shareholders can enjoy the advantages of business expansion, as it allows for easy transfer of ownership through the sale or issuance of shares. However, they are subject to double taxation, meaning that the corporation is taxed on its profits, and the shareholders are also taxed on their dividends received from the corporation.
2. S Corporations
S corporations, on the other hand, are a tax designation available for closely held corporations. By electing S corporation status, the corporation can avoid double taxation. Instead, the corporation’s profits and losses are passed through to its shareholders, who report them on their individual tax returns.
S corporations are subject to certain restrictions, such as a limit on the number of shareholders and the requirement that all shareholders be U.S. citizens or residents. However, they offer the tax benefits of a partnership or sole proprietorship while still providing limited liability protection to their shareholders.
Examples of Closely Held Corporations
Closely held corporations can be found in various industries, including family businesses, small professional practices, and even large enterprises. Here are a few examples of well-known closely held corporations:
- Mars, Incorporated: Mars, the global confectionery and pet food company, is one of the largest closely held corporations in the world. It is known for brands like M&M’s, Snickers, and Pedigree.
- Koch Industries: Koch Industries, an American multinational corporation, is privately owned by the Koch family. It operates in various sectors, including manufacturing, energy, and commodities.
- Cargill, Incorporated: Cargill is an international provider of food, agriculture, financial, and industrial products. It is the largest privately held corporation in the United States.
These examples highlight that closely held corporations can be highly successful, even on a global scale. Their ability to maintain a tight control over decision-making processes and build long-term relationships with their shareholders can contribute to their sustained growth and profitability.
In summary, closely held corporations are business entities where the ownership is held by a small group of individuals or a single family. They offer benefits like limited liability protection and the ability to foster a sense of family and camaraderie. With different tax structures available, such as C corporations and S corporations, closely held corporations can adapt their structure to fit their specific needs and goals. By understanding the definition, types, and examples of closely held corporations, you can gain valuable insights into this unique business entity.