DEFINITION of Closely Held Stock
A closely held stock is a circumstance wherein a company’s common shares are predominantly owned by one individual owner or by a small group of controlling stockholders. This is in contrast to a widely held stock, in which thousands or even millions of different investors may own shares in a large company.
BREAKING DOWN Closely Held Stock
Closely held stock is typically not publicly traded on exchanges because the small number of owners rarely sell their shares. A common way that a closely held stock is created is when an entrepreneur starts and incorporates his or her own business, but retains ownership of the majority of the company's outstanding shares.
Benefits of Closely Held Stock
When a company’s shares are closely held, it could allow the company to apply for S corporation status with the Internal Revenue Service for tax purposes. If the company qualifies, it would report income but not pay taxes. Instead, the shareholders in the S corporation would pay taxes on their proportional share of the profits. If the S corporation saw losses, then the owners of the closely held shares would get tax deductions. Further, there would be no additional tax paid on the company’s dividends.
If the shares in a company are closely held, it can make the company more defensible against hostile takeover attempts or proxy wars. For example, a so-called activist investor might reach out to multitudes of holders of outstanding shares of a publicly traded company and offer to buy them out. This could allow the investor to build up a controlling interest and assert their own plans for the company, such as a sale. Such a strategy would be more challenging to enact with closely held stock due to the considerably smaller number of shareholders who may resist such efforts.
While it would still be possible to acquire the shares from owners, the pricing of such a deal would not be subject to the volatility seen with widely held stock. A drawback to closely held stock is that the company would not have the same access to working capital as businesses whose shares are more freely available. However, the value of the shares in the company is also not exposed to the whims of the trading and investments trends of public stock exchanges and other platforms.
Closely held stock may be gifted to others, for example as a form of inheritance, allowing control of the company to remain in the hands of the beneficiaries on estates. The shares may also be gifted as charity to organizations such as hospitals, universities, and foundations, allowing them to participate in the controlling ownership of the company.