What Is Closed Corporation?
A closed corporation is a company whose shares are held by a select few individuals who are usually closely associated with the business.
- Closed corporations are companies with a small number of shareholders that are privately held by managers, owners, and even families.
- These companies are not publicly traded and the general public cannot readily invest in them.
- Closed corporations have more flexibility compared to publicly traded companies as they are free from most reporting requirements and shareholder pressure.
- With fewer shareholders involved and shares not publicly traded, liquidity can be an issue for closed corporations.
Understanding Closed Corporation
By structuring as a closed corporation when incorporating, a partnership can benefit from liability protection without dramatically changing the way that the business operates. It can also offer companies greater flexibility in operations, as they are free from most reporting requirements and shareholder pressure.
Such a corporate business structure is known by a variety of other names, including the following:
- Close corporation
- Privately held company
- Private company
- Family corporation
- Incorporated partnership
They also may be referred to as "closely held," "unlisted," or "unquoted."
Closed corporations are not publicly traded on any stock exchanges and are thus closed to investment from the general public. Shares are often held by the owners or managers of the business and sometimes even their families. When a shareholder dies or has a desire to liquidate their position, the business or remaining shareholders will buy back the shares.
Because so few parties have ownership shares and no shares are publicly traded, there can be issues with liquidity. However, there also exists a built-in incentive to treat each shareholder, director, or officer fairly.
Closed Corporations Vs. Publicly Traded Companies
Publicly traded companies receive more attention than closed companies because of their listed status and the associated reporting requirements, such as annual reports. Closed companies have less of a reporting burden and thus less of an obligation to transparency. They are not required to publish financial statements or disclose their financial outlook.
This added level of secrecy can prevent competitors from learning about a company's plans and give closed corporations greater flexibility in how they operate. For example, they do not have to answer to shareholder actions or quarterly profit targets that could affect how they conduct business.
Raising money can be difficult for private firms: while they do have access to bank loans and some equity funding, their public counterparts can sell shares or raise money with bond offerings more easily.
Examples of Closed Corporations
There are closed corporations all over the world. They are involved in a wide variety of business pursuits, from retail and manufacturing to business services and financial services.
Forbes's rankings of the largest U.S. private companies found that the largest is Cargill, a multinational involved in a variety of industries, such as manufacturing, trading, and investing. The company had $134.4billion in revenue in 2022 with 155,000 employees.
Some of the other largest private companies are as follows:
- Koch Industries: A conglomerate of industrial and manufacturing enterprises, the company had revenues of $115 billion in 2022 and employed 122,000 people.
- Publix: The Florida-based supermarket chain employs 227,000 workers, generating $45 billion in sales.
- Mars, Inc.: A global candy, pet food, and food product manufacturer that is 100% family-owned. It earned roughly $40 billion in 2022 and employed 130,000 people.
Ernst & Young, PricewaterhouseCoopers, SC Johnson, Hearst Corporation, and Chick-Fil-A, and Hobby Lobby are other well-known U.S. closed corporations. Some examples of a non-U.S. closed corporation are Sweden's IKEA, Germany's ALDI and Bosch, and Denmark's LEGO.
There are some companies that went public, then at a later date decided to go back to being private again, and then even went back to being public. One example of this is Dell Technologies (DELL), the computer company. Founder Michael Dell took the company public in 1988 and then went private in 2013. The company went public again in 2018.
Can I Invest in a Closed Company?
Generally, ordinary investors would not have access to the shares of a closed company, as they are held by a small number of insiders such as top managers, co-founders, early investors, or their immediate family members.
Closely held stock may be gifted to others, for example as a form of inheritance to one's heirs, allowing control of the company to remain in the hands of the beneficiaries on estates. The shares may also be gifted as a charity to organizations such as hospitals, universities, and foundations, allowing them to participate in the controlling ownership of the company.
Do Closed Companies Pay Dividends?
A closed company may elect to pay dividends to its shareholders. But, because issuing dividends may result in double taxation, most closely held corporations opt to not pay dividends.
Is a Closed Company the Same as a Closed Fund?
No, a closed company refers to a privately-held company with a small number of shareholders.
A closed fund or ETF is instead a type of pooled investment vehicle that is no longer accepting new inflows of capital. A fund closed to new investments may be winding down and terminating, or else has reached some specified amount of assets that prevents it from taking in more money. A closed-end fund is a variation of a closed fund that raises money only at the beginning of its life, issuing a fixed number of shares or units. These units then can trade perpetually on the secondary market, but new shares cannot be created.