A close corporation is generally a smaller corporation that elects close corporation status and is therefore entitled to operate without the strict formalities normally required in the operation of standard corporations. Many small business owners find this benefit invaluable. In essence, a close corporation is a corporation whose shareholders and directors are entitled to operate much like a partnership. The close corporation election is made at the state level, and state laws vary with respect to the eligibility of close corporation status and the rules governing them. Some states do not authorize them.
Corporations must meet particular requirements to be eligible for close corporation status. Generally speaking, a close corporation cannot have more than a particular number of shareholders—the limit is between 30 and 35 in most states. A close corporation cannot make a public offering of its stock. Typically, shareholders must agree unanimously to close corporation status, and a written shareholders’ agreement governing the affairs of the corporation must be drafted. Shareholders’ agreements are fairly complex and should probably be left to experienced counsel.
Close corporations enjoy relaxed rules with respect to the formalities of governance. For example, close corporation shareholders typically need not hold formal annual meetings. Close corporation shareholders may override the directors and act on their own, thereby usurping an authority typically lodged with the directors.