Forming a company brings benefits including risk management, tax minimization, privacy and increased professionalism. Less mentioned are the bureaucratic hassles. Close companies minimize red tape and are intended for single owners and small groups who know each other well.
No annual or regular meetings are required.
Flexible distributions are allowed and it's easier to stay in compliance.
Prevent outsiders from suddenly having a say in your company.
Formalities are unnecessary when you’re the sole owner, or partners are family members and close associates. Why hold an "annual meeting” when you already frequently meet anyway? Or even odder, when you’re the only owner? That sounds a lot like talking to yourself.
The general features of a close company are reduced corporate formalities in exchange for share and membership restrictions. The largest difference owners will see is with Corporations rather than LLCs. This is because LLCs enjoy abbreviated governance to begin with.
There may only be 35 owners, and owners must provide right of first refusal to existing owners when selling to a 3rd party. This share transfer restriction may be viewed nevatively positively as it keeps outsiders from suddenly seizing control or having a seat at the table.
Transfer restrictions may be seen as a double edged sword. Owners must provide right of first refusal to existing owners when selling. This makes it harder to sell, but means you are protected from a third party unexpectedly seizing control of company affairs. Family run businesses may not, for example, want children selling gifted shares to outsiders. Or tighly knit groups may want to prevent outsiders from suddenly having a say in the company.
Single member LLCs and one owner corporations have little reason not to choose the close designation. Why worry about disclosures or meetings when you are the only owner? They only result in increased compliance costs. Learn more about single member LLCs here.
With multiple owners, though, the answer varies. The question becomes how well the owners know and trust one another. Should regular meetings be required? That is a question only you and your partners can answer.
To be certain, these constraints are important checks for larger companies. Minority shareholders deserve respect. However, small closely held companies find such compliance drains important resources and time. If you and fellow owners know is it really necessary to notify family members via certified mail about strategy changes?
The structure arose because some small groups don’t require the usual protections and oversight. For example, in a family owned business it is assumed the group is kept well aware of the company's affairs. Decisions are discussed during meals. There is no need to hold formal meetings or place notices in writing. Similarly, the group won’t want outsiders to be able to easily gain a seat at the table if one member becomes upset.
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