Legal Definitions - closely held corporation

A closely held corporation is a type of business structure owned by a small number of individuals, often members of the same family or a tight-knit group of partners. Unlike large public companies, the shares of a closely held corporation are not traded on stock exchanges, meaning ownership is private and not available to the general public.

Because of this intimate ownership structure, several unique characteristics apply:

• Private Ownership: The company's shares are held by a select few, typically founders, family members, or a small group of investors.
• No Public Trading: Shares are not bought or sold on public stock markets. Transfers of ownership usually happen privately, often with restrictions.
• Heightened Duties: Due to the close relationship among owners, many legal systems expect shareholders in a closely held corporation to act with a higher degree of loyalty and good faith towards each other, similar to partners in a partnership. This means they must generally avoid actions that would unfairly harm other shareholders or the company.
• Transfer Restrictions: To maintain control within the small group, closely held corporations often have agreements (like "buy-sell agreements") that dictate how and to whom shares can be transferred if an owner wishes to sell or leaves the company.
• Minority Shareholder Protections: If a minority owner feels unfairly treated by the majority, they may have special legal avenues to seek redress directly against other shareholders, rather than having to sue on behalf of the corporation itself. This acknowledges the unique power dynamics in such small ownership groups.

Here are some examples to illustrate how a closely held corporation operates:

• Example 1: The "Family Legacy Winery"

  Imagine "Vine & Barrel," a renowned winery that has been passed down through three generations of the Chen family. The company's shares are divided among the founder's three grandchildren, who all actively manage different aspects of the business. The shares are not listed on any stock exchange, and if one grandchild decides to retire, their shares must first be offered to the other family members according to a pre-arranged agreement. This demonstrates a closely held corporation because ownership is concentrated within a small, related group, shares are not publicly traded, and there are likely restrictions on how shares can be transferred to maintain family control.

• Example 2: "InnovateTech Solutions"

  Four university friends founded "InnovateTech Solutions," a software development firm specializing in custom business applications. Each friend owns an equal share of the company, and they all serve on the board of directors. If one founder, acting as CEO, attempts to divert a significant company contract to a separate business they secretly own, without the knowledge or consent of the others, this could be considered a breach of the heightened duties of loyalty and good faith expected among shareholders in a closely held corporation. Their close working relationship and shared ownership imply a strong obligation to act in the best interest of all owners.

• Example 3: "The Neighborhood Bistro"

  Sarah and Mark, two chefs, pooled their resources to open "The Gilded Spoon," a popular local restaurant. They are the sole shareholders, each owning 50% of the corporation. They have a written agreement stating that if either of them wishes to sell their shares, they must first offer them to the other shareholder at a pre-determined valuation. This ensures that control of their restaurant remains with one of the original founders and doesn't fall into the hands of an unknown third party. This scenario highlights the small ownership group, the absence of public trading, and the common use of share transfer restrictions to protect the owners' shared vision and control.