What is a '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. Such a corporate business structure is known by a variety of other names, such as "close corporation," "privately held company," "private company," "family corporation" or "incorporated partnership." Such a company may be referred to as "closely held," "unlisted or "unquoted." By structuring as a closed corporation 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.

Breaking Down 'Closed Corporation'

Closed corporations are not publicly traded on any stock exchanges and are, therefore, closed to investment from the general public. Shares are often held by the owners/managers of the business and sometimes even their families. When a shareholder dies or has a desire to liquidate his or her 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.

Publicly traded companies receive more attention that 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 therefore a lesser 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 which could affect how they conduct business.

Closed Corporation Examples

There are closed corporations all over the world, including well over 400 in the United States. They are involved in a wide variety of business pursuits, from retail and manufacturing, to business services and financial services. Forbes' 2017 ranking of the top 225 U.S. private companies found that the largest is Cargill, Inc., a conglomerate that trades and distributes agricultural and other commodities such as grain, livestock, steel, edible oils and other foodstuffs. In 2017 it employed over 150,000 workers and had revenues of over $100 billion. Other large U.S.-based private companies include:

  • Koch Industries, Inc.: A multinational involved in a variety of industries, such as manufacturing, trading and investing, that earned over $100B in 2017.
  • Albertsons Companies LLC: The second-largest supermarket chain in the United States with over 2,200 locations and some $60B in revenue in 2017.
  • Mars, Inc.: A global candy, pet food and food product manufacturer that is 100% family owned. It earned roughly $35B in 2017.

S. C. Johnson & Son, Hearst Communications Inc., and Publix Super Markets, Inc. are other well-known U.S. closed corporations. Some examples of non-U.S. closed corporation are Sweden's IKEA, Germany's ALDI and Bosch, and Denmark's LEGO.

 

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