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, including the following:

Such a company may be referred to as "closely held," "unlisted," or "unquoted."

By structuring as a closed corporation when incorporated, 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.

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.

Understanding Closed Corporations

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 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.

How Closed Corporations and Publicly Traded Companies Differ

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 which could affect how they conduct business.

Key Takeaways

  • Closed corporations are companies whose shares are held by a small group of entities or individuals closely associated with the company.
  • Closed corporations are also known as privately held companies, family corporations, or incorporated partnerships, among other names.
  • These companies are not publicly traded and the general public cannot invest in them; most shares are held by managers, owners, and even families.
  • 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.

Examples of Closed Corporations

There are closed corporations all over the world, including 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' 2018 rankings 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 2018, it employed over 155,000 workers and had revenues of nearly $115 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 $110B in 2018.
  • Albertsons Companies LLC: The second-largest supermarket chain in the United States with over 2,200 locations and nearly $60B in revenue in 2018.
  • Mars, Inc.: A global candy, pet food, and food product manufacturer that is 100% family owned. It earned roughly $35B in 2018.

Deloitte, PricewaterhouseCoopers, S. C. Johnson & Son, Hearst Communications Inc., and Publix Super Markets, Inc. 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.