What Is a Closely Held Corporation?

A closely held corporation is any company that has only a limited number of shareholders. Often, its stock is exchanged only infrequently but which are often listed on public exchanges, although they often also trade on over-the-counter (OTC) exchanges.

These entities differ from privately owned firms that have stock that is not publicly traded on an exchange (neither listed nor OTC). 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 because questions of liquidity, insider status, and majority stakeholder responsibilities may come into play.

Key Takeaways

  • A closely held company is a publicly listed corporation that has a small number of concentrated shareholders.
  • Trading in these shares is dominated by company insiders, and they tend to be quite illiquid with infrequent volume.
  • Closely held companies are at less risk of a hostile takeover since obtaining a controlling interest through equity would be difficult to come by.

Understanding Closely Held Corporations

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 or other insiders associated with a particular business. To qualify as a publicly traded company with closely held status, a minimum number of shares must be held by persons outside the business, such as members of the public at large.

The shares of a closely held company are known as closely held shares.

Share Prices

Since shares are not often traded on the open market, share prices of closely held companies tend to be more stable. On the other hand, since fewer shares are outstanding for public trading they may also experience less liquidity and depth of market, making them more volatile.

Still, some argue that there is less influence from irrational market activity on the price because trading is so limited. This prevents the business from being subject to the whims of average, uninformed investors, who can be unpredictable in nature, though 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. The lack of shares on the open market make it challenging to get the information necessary to make such estimates.

Controlling Shareholders

The closely held company is often controlled by a small number of large shareholders because 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.

When these shareholders do effect transactions, tax implications and controlling interest concerns will often come into play, as will insider trading disclosures.

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 because all decisions made on the behalf of the business are solely for the interest of the business itself.