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.

RELATED TERMS
  1. Closely Held Shares

    Closely held shares of stock are held by a small group of investors ...
  2. Closely Held Corporation

    A closely held corporation is any firm that has only a limited ...
  3. Stock

    A stock is a form of security that indicates the holder has a ...
  4. Outstanding Shares

    Outstanding shares refer to a company's stock currently held ...
  5. Privately Owned

    Privately owned refers to businesses that have not offered public ...
  6. Private Company

    A private company is a company held under private ownership with ...
Related Articles
  1. Managing Wealth

    Keeping Control of Your Business After the IPO

    Taking a company public doesn't mean founders must completely give up calling the shots. Before the IPO, consider these tactics to keep control after it.
  2. Taxes

    Taxes in New York for Small Business: The Basics

    Learn how small businesses are taxed in New York, and understand how tax rates vary based on whether the business is an S corporation, LLC or partnership.
  3. Investing

    Why Do Companies Care About Their Stock Prices?

    A company's stock price reflects the company's earnings potential, its future viability, determines management compensation can play a critical role in mergers and acquisitions.
  4. Managing Wealth

    5 Reasons Small Business Owners Sell Their Companies

    Selling a business you've built from scratch isn't done lightly. Consider these moments when the opportunity might be right for you.
  5. Investing

    The Basics Of Outstanding Shares And The Float

    We go over different types of shares and what investors need to know about them.
  6. Investing

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  7. Know Your Shareholder Rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company.
  8. Investing

    How to pick winning penny stocks

    When choosing penny stocks, wise investors note several key factors that affect the way these stocks trade – and the inherent risks that can follow.
RELATED FAQS
  1. Shares outstanding versus floating stock: what's the difference?

    Shares outstanding and floating stock are different measures of the shares of a particular stock. Learn the difference and ... Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center