What Is a Closely Held Corporation?

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A closely held corporation is a business where a small group of shareholders own most of the stock, giving them a controlling interest in the company. In contrast to a public company, the shares are not available for trading on open stock exchanges, and most shares are owned by family members, founders, long-time employees, or early backers. 

More than a quarter of US companies were family-owned in 2021, according to the US Small Business Administration’s Office of Advocacy. Many of these businesses have 10 employees or fewer and operate as closely held corporations. And some of the biggest companies you might recognize—like Amazon, Apple, and Google (now Alphabet)—started off as closely held corporations, before their initial public offerings (IPOs). 

Learn more about closely held corporations, how the structure works in day-to-day business operations, and the advantages and disadvantages owners should weigh before choosing it.

What is a closely held corporation?

According to the US Internal Revenue Service, a closely held corporation is generally one in which five or fewer individuals own more than 50% of the corporation’s outstanding stock, giving them a controlling ownership stake in the business. Family members, founders, and small groups of business partners often choose this structure to limit ownership and control to a tight-knit group, rather than opening the business up to many shareholders with different and sometimes conflicting priorities and goals.

The broader term “closely held business,” sometimes called a closely held company, encompasses additional entity types, such as partnerships and limited liability companies (LLCs) with a small number of owners. 

But a closely held corporation specifically refers to a private corporation. It can be structured as a C corporation or S corporation, depending on how the owners want income treated for tax purposes.

Closely held corporations vs. publicly held corporations

Both closely held and publicly held corporations offer similar legal protections for its owners. Each is a legally separate entity, so shareholders generally aren’t personally liable for business debts. Both types of corporation issue stock to represent ownership, and both can operate as S corps, provided they meet IRS rules on eligibility, such as limiting ownership to no more than 100 shareholders.

However, a publicly held corporation lists shares on public stock exchanges, giving it access to a wide range of investors. A closely held corporation’s shares are not traded publicly, and the corporation’s shareholder agreement may limit or completely prohibit trading or transfers of shares. 

Who typically forms closely held corporations?

Family members starting a business together often establish a closely held corporate structure, letting them retain ownership, even across generations. Founders also often use this structure when they want to avoid ownership dilution by admitting outside shareholders or courting public investors.

Other closely held corporations form when a small group of business partners or private investors pool resources to start a company and agree from the outset to limit who can obtain shares. 

How a closely held corporation works

• Shareholder agreements
• Day-to-day management
• C corporation classification vs. S corporation classification
• Raising capital

Because so few people have an ownership stake in a closely held corporation, shareholders often play a direct role in daily management. The business typically drafts a shareholder agreement formalizing the arrangement, which also provides a road map for how the business will run as ownership evolves.

Shareholder agreements

The shareholder agreement spells out how the owners will make major decisions, resolve disputes, and handle a shareholder’s exit, whether through retirement, death, or a decision to sell their stake. These agreements often cover voting rights, profit distribution, and what happens if the owners decide to dissolve the corporation.

Closely held corporation shareholder agreements often exercise restrictions on selling or transferring stock. An example might be a buy-sell provision, which gives existing shareholders the first opportunity to purchase shares before an owner sells to an outside party. Restrictions like this help the remaining shareholders retain control, limiting who can join the ownership group and protecting the business’s closed corporation status.

Day-to-day management

Shareholders in closely held corporations often serve as managers or directors. This combination can simplify operational leadership and decision making, since business decisions both large and small stay within a small, familiar group. The corporation still needs to hold shareholder meetings, however, keep meeting minutes, and follow the other corporate formalities required in the state of incorporation, along with the terms of the shareholder agreement.

C corporation classification vs. S corporation classification

A closely held corporation can operate as a C corp or S corp, and the choice affects how the business is taxed. C corps pay tax on their business profits and shareholders then pay personal income tax on any dividends or distributions they receive, resulting in what’s known as double taxation.

Some closely held corporations elect S corp status instead, which lets profit and losses pass through directly to shareholders’ personal tax returns, avoiding the double taxation that comes with traditional C corps. 

To qualify, the IRS requires an S corp to have no more than 100 shareholders, only one class of stock, and only individuals, certain trusts, and estates as eligible shareholders. Because most closely held corporations already have only a few shareholders, many qualify for S corp status without much restructuring. 

A tax professional can help confirm eligibility and weigh the tax-planning trade-offs of each classification. Comparing S corp vs. C corp structures in more detail can also help clarify which classification fits your business and your goals.

Raising capital

Because its stock doesn’t trade on a stock exchange, a closely held corporation can’t raise capital by selling shares to the general public. Instead, these businesses tend to fund growth through retained earnings, loans, or contributions from existing shareholders and private investors. 

Businesses that need outside funding can also explore other ways to raise capital, from small business loans to bringing on a limited number of outside investors who agree to the corporation’s existing transfer restrictions.

Advantages and disadvantages of a closely held corporation

Choosing the right business structure means weighing what a closely held corporation offers against what it asks owners to give up.

Advantages of closely held corporations

Some benefits of operating your business as a closely held corporation include:

• Greater control over business decisions. With ownership concentrated among a few shareholders, decisions can move forward without sign off from a large or dispersed shareholder base with competing priorities.

• No pressure from public shareholders. Because the shares aren’t traded publicly, owners can set long-term priorities without managing the quarterly earnings expectations that come with public corporations.

• Privacy. Closely held corporations often face fewer requirements to publish detailed financial statements or disclose business decisions to the general public, compared with a public company.

• Stable ownership that supports continuity. When shareholders typically hold their stock for years, sometimes across generations of family members, the business can pursue long-term plans without the ownership turnover that publicly traded companies can experience.

Disadvantages of closely held corporations

Some drawbacks of operating your business as a closely held corporation include:

• Limited access to outside funding. Since stock isn’t sold on public exchanges, a closely held corporation has much less access to the deep pool of capital that publicly traded companies can tap.

• Lower liquidity for shareholders. Transfer restrictions and a small pool of potential buyers can make it harder for shareholders to sell shares and use their capital for other purposes. Minority shareholders also have limited influence over major decisions.

• Potential for disagreements between shareholders. With relatively few parties involved, disputes over succession planning, day-to-day operations, or business decisions can be harder to resolve than in a corporation with a more formal governance structure.

• Full corporate formalities. Officers and directors still have fiduciary responsibilities to the corporation and its shareholders, and the business needs to maintain the same corporate formalities, such as recording meeting minutes and abiding by bylaws, as any other corporation does regardless of size.