Delaware Close Corporation: Important Things To Know

What is a Delaware close corporation?

A close corporation is a Corporation that is privately owned and operated by a small number of shareholders, typically no more than 30 individuals.

The shares of a close corporation are not available for trading on stock exchanges. Instead, these shares are typically held by a small group of individuals or closely related parties, and there may be restrictions on transferring ownership to maintain the private nature of the company.

In Delaware, close corporations can enjoy exemptions from various corporate requirements and formalities, such as the obligation to hold annual meetings to elect a board of directors.

You can set up and run your close corporation similar to a Limited Liability Company (LLC) or a Limited partnership in terms of management, profit allocation, official choices, or partners/shareholders recruitment.

The tax status of your close corporation can be chosen between a C Corporation and an S Corporation, and the applicable tax rules will be based on your preferred tax designation.

It should be noted that a close corporation may not always be a good option for businesses. If significant amounts of capital are required in the future, you may need to change the structure of your company to obtain additional funding. A close corporation, in general, can only accept investments from its shareholders.

Yet, there are significant advantages, such as no public information about shareholders, company value, or employee count.

Advantages and disadvantages of a close corporation

Advantages

Below are the main advantages of this business type.

• Simpler overall operation: In such private companies, those in charge of the business are more active in day-to-day operations. So, there isn’t a disparity between the business goals.

• Fewer formalities: There are fewer regulations to follow. Still, the owners must follow the rules for submitting incorporation documents.

• Restricted liability: The shareholders are not personally responsible for the debt of the company. Still, there are some exceptions, such as where a shareholder has consented to accept personal liability for the company’s debts.

• Greater freedom: The owners are not under as much supervision from the board of directors as in traditional businesses. They can run the corporation how they want, such as targeting new markets, exploring new strategies, and so on.

• More control over shares: When and how shares are sold to outside investors is largely under the hands of shareholders.

Disadvantages

Still, there are a few shortcomings that you should be aware of before choosing this corporate structure. Some may include:

• Not all states permit close corporations. So if you want to move your close corporation to another state, choose the one that recognizes this business form. In this case, you need to file for a continuation certificate and formation document certified copy.

• Organizing a close corporation frequently costs more money. Thus, it places more financial problems and responsibility on its owners. For more detailed information, here is the list of corporate fees.

• A private corporation is prohibited from selling its stock to the public, which may have an impact on the company’s total value and cash flow.

• A close corporation’s resale value is frequently lower than it would be for a regular business.

Apart from the close corporation, there are many types of businesses in Delaware, and each has its pros and cons. For further information, read the article about common business entity types in Delaware.

Close corporation vs General corporation

A close corporation is a corporate structure that is frequently misunderstood. Some mistakenly label it a ‘closed’ corporation, which is inaccurate.

Additionally, it’s not to be confused with a C corporation; the ‘C’ in C corporation doesn’t stand for ‘Close,’ so ‘C corporation’ is not a short form of ‘Close corporation.
To clarify the primary differences between a close corporation and a general corporation, consider the following distinctions:

Ownership structure

A close corporation is typically owned by a small number of shareholders, often family members or closely related parties. The number of shareholders in a close corporation is limited, typically to no more than 30 individuals.

On the other hand, a general corporation, also referred to as a publicly held or widely held corporation, can have a large number of shareholders. Its shares are often publicly traded on stock exchanges, allowing for broad ownership among the general public.

Share transferability

Shares in a close corporation are usually subject to restrictions on transfer. These restrictions may limit the ability to sell or transfer shares, aiming to preserve the company’s private and closely-held status.

In contrast, shares in a general corporation can be freely transferred, allowing ownership to change hands easily through the buying and selling of shares on the open market.

Governance and formalities

Close corporations enjoy certain exemptions from the corporate formalities and obligations that generally apply to general corporations. This grants them greater flexibility in structuring their management and decision-making procedures.

In contrast, general corporations are typically subject to more extensive corporate formalities, including holding annual meetings, electing a board of directors, and complying with regulatory and reporting requirements.

Capital raising

Close corporations may face limitations when raising capital because they can generally only accept investments from existing shareholders. This limitation can be a drawback if significant capital infusion is needed.

General corporations have more opportunities to raise capital by issuing new shares to the public or seeking external investors.

Conclusion

We have explained all the information you need to know about the Delaware Close corporation. This business status has some outstanding benefits alongside some disadvantages, so you should consider each factor carefully before deciding whether to establish one.

Our friendly consultants can provide helpful guidance for any difficulty you may encounter with this type of corporate status, simply drop us a message via service@bbcincorp.com and we’ll get in touch the soonest.

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