What is a Closely Held Corporation?
All corporations have the ability to release shares of stock to potential investors. However, some corporations are not publicly held, meaning that shares of stock are not available to the public. These corporations are known as closely held corporations. By definition, over half of the shares must be owned by fewer than five individuals in order to qualify as a closely held corporation. These corporations are private companies and do not trade on an open market.
Advantages of a Closely Held Corporation
While some major corporations are publicly traded on a stock exchange and have hundreds or thousands of shareholders, most corporations are closely held, owned by just a handful of individuals. Some of the advantages of a closely held corporation include:
- Ability to make changes quickly. Unlike publicly traded corporations which require the votes of thousands of shareholders to make a company decision, closely held companies can quickly vote on issues and begin to take action right away.
- Ability to withstand market fluctuations. When the market rises or falls sharply, investors may be inclined to buy or sell all at once, greatly affecting the fate of a publicly traded corporation. On the other hand, closely held corporations are not as susceptible to market fluctuations and can better withstand a major dip in the market.
- Personal stake. Since the majority of shares are owned by a small group of individuals who usually are involved in the management or operations of a company, the shareholders have a personal stake in seeing the company succeed, which makes them more likely to be actively involved in decisions that affect the corporation.
If you are thinking about incorporating your business, it is important to know all of your options.
Contact Us
To learn more about the differences between a public traded corporation versus a closely held corporation, contact the business formation professionals of Texas Legal Entities today at 512-472-2431.
At any time, please feel free to ask us a question. It's FREE!