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| Introduction: Nature and Structure of Closely Held Corporations |
| Resources >>Closely Held Corporation>>Introduction |
Nature and Structure of Closely Held Corporations
A corporation is a form of business that is created by state law. The law views the corporate entity as a separate “person,” distinct from its
owners and managers, that may own property, enter into contracts, sue and be sued in its own name. This legal distinction between the
corporation and its owners has the advantage of shield the owners from liabilities from personal liability for the debts of the corporation. A
limited liability company (LLC) is similar in many respects, but the legal organization is different, and most state laws permit greater flexibility
among the owners in determining how an LLC is governed and structured. The other major form of business is a general partnership. Unlike
a corporation or LLC, the general partnership is not a creature of state law but of the agreement among the partners. Unlike a corporation
or LLC, each of the partners is personally liable for the debts of the partnership. A Limited Partnership is the same as a general
partnership, except that it also contains “limited partners” who are part owners of the business but are not personally liable for the debts of
the partnership and are not permitted to be actively involved in the business of the partnership.
A “closely held corporation” is a corporation whose stock is not publicly traded on an established market and is generally characterized by a
small number of shareholders who tend to be actively involved in the operation of the business. A closely held corporation is contrasted with
a publicly held corporation, such as Exxon or GM, which have thousands of shareholders, who are passive investors and who are able to
buy and sell their shares in public markets, such as the New York Stock Exchange. While the public corporations are much more visible and
well-known, there are many, many more closely held corporations than public ones. Legally, the organization and laws governing the
internal affairs of public corporations is exactly the same as for closely held corporations; but on a practical level, the challenges and risks of
ownership in a closely held corporation are vastly different.
Unlike shareholders in public companies, shareholders in closely held corporations are usually directly involved in the business and expect
a return on their investment, not through dividends or increases in the price of their shares, but through the profits generated by their
efforts in the corporation paid out in salaries or distributions. The public markets for the buying and selling of shares in public companies is
tightly regulated both by the federal government and by the exchanges, and these regulations protect the public shareholders and ensure
that accurate information about the public corporations is regularly released and readily available to the public. These securities regulations
do not apply to closely held corporations, and shareholders in these companies often have a difficult time getting information about their
companies. Finally, shareholders of closely held corporations usually have a very difficult time finding a buyer for their shares. If a
shareholder of Exxon or GM is unhappy with the management, they can simply sell their shares at the market price; while shareholders in
closely held corporations are frequently locked-in with no ability either to sell or to cash out their investment.
All corporations are governed by majority rule. Typically, the shareholders elect directors by majority vote. The board of directors run the
corporation by majority vote. This centralized model of corporate governance is efficient and effective and makes possible the running of a
large public corporation with thousands and thousands of owners; but in small corporations, it creates the possibility for majority owners or
groups who together control a majority of the shares or a majority on the board of directors to ignore completely the interests and desires of
minority shareholders.
At Fryar Law Firm, P.C., we work with owners of closely held corporations who are involved in disputes of various kinds. We consult with
majority owners as to their rights and responsibilities and frequently defend their interests in litigation. We also represent minority
shareholders and fight for their rights and interests. Minority shareholders do have legal rights, and majority shareholders often forget that
the legal power and authority that their majority ownership gives them come with some important duties and responsibilities to the minority
owners. We have made the materials on this website available to the public to help inform both shareholders and our colleagues of the bar
with regard to this important and sometimes difficult area of the law. Please read the disclaimers and conditions of use. We cannot provide
legal advice through this website, but we are happy to consult on any specific matter. If you wish to retain our services, please contact us.
Good luck. We hope you will find these resources helpful and informative.
A corporation is a form of business that is created by state law. The law views the corporate entity as a separate “person,” distinct from its
owners and managers, that may own property, enter into contracts, sue and be sued in its own name. This legal distinction between the
corporation and its owners has the advantage of shield the owners from liabilities from personal liability for the debts of the corporation. A
limited liability company (LLC) is similar in many respects, but the legal organization is different, and most state laws permit greater flexibility
among the owners in determining how an LLC is governed and structured. The other major form of business is a general partnership. Unlike
a corporation or LLC, the general partnership is not a creature of state law but of the agreement among the partners. Unlike a corporation
or LLC, each of the partners is personally liable for the debts of the partnership. A Limited Partnership is the same as a general
partnership, except that it also contains “limited partners” who are part owners of the business but are not personally liable for the debts of
the partnership and are not permitted to be actively involved in the business of the partnership.
A “closely held corporation” is a corporation whose stock is not publicly traded on an established market and is generally characterized by a
small number of shareholders who tend to be actively involved in the operation of the business. A closely held corporation is contrasted with
a publicly held corporation, such as Exxon or GM, which have thousands of shareholders, who are passive investors and who are able to
buy and sell their shares in public markets, such as the New York Stock Exchange. While the public corporations are much more visible and
well-known, there are many, many more closely held corporations than public ones. Legally, the organization and laws governing the
internal affairs of public corporations is exactly the same as for closely held corporations; but on a practical level, the challenges and risks of
ownership in a closely held corporation are vastly different.
Unlike shareholders in public companies, shareholders in closely held corporations are usually directly involved in the business and expect
a return on their investment, not through dividends or increases in the price of their shares, but through the profits generated by their
efforts in the corporation paid out in salaries or distributions. The public markets for the buying and selling of shares in public companies is
tightly regulated both by the federal government and by the exchanges, and these regulations protect the public shareholders and ensure
that accurate information about the public corporations is regularly released and readily available to the public. These securities regulations
do not apply to closely held corporations, and shareholders in these companies often have a difficult time getting information about their
companies. Finally, shareholders of closely held corporations usually have a very difficult time finding a buyer for their shares. If a
shareholder of Exxon or GM is unhappy with the management, they can simply sell their shares at the market price; while shareholders in
closely held corporations are frequently locked-in with no ability either to sell or to cash out their investment.
All corporations are governed by majority rule. Typically, the shareholders elect directors by majority vote. The board of directors run the
corporation by majority vote. This centralized model of corporate governance is efficient and effective and makes possible the running of a
large public corporation with thousands and thousands of owners; but in small corporations, it creates the possibility for majority owners or
groups who together control a majority of the shares or a majority on the board of directors to ignore completely the interests and desires of
minority shareholders.
At Fryar Law Firm, P.C., we work with owners of closely held corporations who are involved in disputes of various kinds. We consult with
majority owners as to their rights and responsibilities and frequently defend their interests in litigation. We also represent minority
shareholders and fight for their rights and interests. Minority shareholders do have legal rights, and majority shareholders often forget that
the legal power and authority that their majority ownership gives them come with some important duties and responsibilities to the minority
owners. We have made the materials on this website available to the public to help inform both shareholders and our colleagues of the bar
with regard to this important and sometimes difficult area of the law. Please read the disclaimers and conditions of use. We cannot provide
legal advice through this website, but we are happy to consult on any specific matter. If you wish to retain our services, please contact us.
Good luck. We hope you will find these resources helpful and informative.
Author:
Eric Fryar
Eric Fryar
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| Last Updated: 2/20/2011 |