What to know about a close corporation

On Behalf of | Aug 15, 2019 | Business Formation | 0 comments

Not all Illinois corporations are large entities. It is possible to form a corporation that is small in size and less formal to operate, also known as a close corporation. Some business owners prefer to form a close corporation because of the benefits it offers. However, there are certain requirements that must be met to form a close corporation, and depending on your desires, you might find a close corporation too limiting.

Many entrepreneurs find close corporations an attractive choice because they lack many of the formalities that govern bigger corporations. According to Chron.com, formal annual meetings are generally not necessary in a close corporation. Also, close corporations allow shareholders greater control over business decisions, which include overriding choices made by the directors if the shareholders wish.

Close corporations are additionally defined by their small number of shareholders, even comparing strongly against another small corporation like an S-corporation. The IRS requires S-corporations to have no more than one hundred shareholders. Close corporations may be more limited than that. Even though state laws vary in their requirements, they generally cap shareholders of a close corporation at thirty to thirty-five.

One of the major downsides of forming a close corporation is that the corporation cannot offer stock to the public. If the corporation needs financing, it will have to look to other sources. Also, a close corporation is usually governed by a shareholders’ agreement, which is likely to be complex in nature. These kinds of agreements usually need the help of business counsel to draft.

Not every state allows for a close corporation to be formed. However, Illinois is not one of those states. The Business Corporation Act of 1983 authorizes state residents to form a close corporation per the guidelines set forth in the law, including a declaration that the business is a close corporation. State law also authorizes close corporations to set forth shareholder rights and responsibilities, including how to resolve disputes, how the business is to be managed, and voting requirements.