Closely Held Corporation

What is a 'Closely Held Corporation'

A closely held corporation is any company that has only a limited number of shareholders; its stock is publicly traded on occasion but not on a regular basis. These entities differ from privately owned firms that issue stock that is not publicly traded. Those who own shares of closely held corporations should consult a financial planner with expertise in the tax and estate ramifications that come with this type of stock.

BREAKING DOWN 'Closely Held Corporation'

Despite the fact the corporation's stock is listed, many transactions between major shareholders and closely held corporations do not receive the same preferential tax treatment as those of corporations with actively traded stocks. Deductions and losses may not be allowed in some instances for parties involved in these transactions.

A closely held corporation, also referred to as a closed corporation, is a firm whose stock is held by a small number of people. While this may include traditional investors, it may also be held by the family members associated with a particular business. To qualify, a minimum number of shares must be held by persons outside of the business, such as members of the public at large.

Controlling Shareholders

The closely held company is often controlled by a small number of shareholders, as they are in possession of the majority of the shares. Most often, these shareholders maintain their investments over the long term, resulting in few opportunities for new investors to acquire a large enough stake to become a controlling member as only minority stakes tend to come available for trade.

Closely Held Companies and Hostile Takeovers

Since the majority shareholders rarely release any of their shares, this makes it difficult for an outside entity or corporation to attempt a hostile takeover, as only a minority stake is regularly traded. This can provide a sense of stability, as all decisions made on the behalf of the business are solely for the interest of the business itself.

Closely Held Companies and Share Prices

Since shares are not often traded on the open market, share prices of closely held companies tend to be more stable. There is less influence of irrational market activity on the price as trading is so limited. This prevents the business from being subject to the whims of average investors, who can be unpredictable in nature, although it comes at the cost of being more difficult to raise additional capital through the sales of associated stock. It is also difficult to properly value the company, as the lack of shares on the open market make it challenging to get the information necessary to make such estimates.