What is a Close Corporation?

Key Features of a Close Corporation

A Close Corporation is a distinct business entity that exists in many countries. It has many of the same characteristics as a traditional corporation but scales down some of the complexities and formalities.

• Size: A Close Corporation typically consists of between one and 10 shareholders, each of whom may have full ownership of the Company. It is not possible for a Close Corporation to enlist on the stock exchange.
• Structure: All shareholders must be members of the board and have a direct say in the company’s operations, making it ideal for a small group of people who want to maintain direct control over the business.
• Governance: Unlike a traditional corporation, there is no requirement for annual director meetings, shareholder meetings, or filing of accounts in some countries with a Close Corporation. This is in exchange for shareholders taking greater personal liability.

Advantages and Disadvantages of a Close Corporation

A Close Corporation offers many advantages but also has its drawbacks.

• Advantages:
  • The small size of the company makes it easier to manage and pass decisions.
  • It offers more flexibility in the company’s operations.
  • It is often more affordable than other corporation types to set up and maintain.
• Disadvantages:
  • Shareholders potentially have unlimited personal liability.
  • It is impossible to list on the stock exchange.
  • The absence of annual meetings and filing of accounts can lead to difficulties in monitoring the company’s performance.

Compliance and Governance in a Close Corporation

Close Corporations still need to adhere to the laws and regulations in their jurisdiction, just like other corporations. This includes rules around starting the company, employee and employer obligations, taxes, and practice of business.

It is important that shareholders of a Close Corporation review and comply with the regulations and laws in their jurisdiction. In some countries, the rules around governance of a Close Corporation tend to be less strict than those of a traditional corporation. This means that shareholders must be even more vigilant in ensuring everyone is adhering to the rules.