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How “Close Corporations” Are Different

Since many entrepreneurs prefer a certain degree of personal control and flexibility when handling their business dealings, a large number of them (perhaps a majority) choose to form “close” corporations as opposed to the more traditional kinds. They believe that the positive attributes of this structure outweigh its negative ones.

Here's a brief summary of the rather unique aspects of a “close corporation” compared to others business structures.

Advantages and Disadvantages of “Close Corporations”

Advantages

  1. They involve fewer formalities than other more traditional corporations;

  2. There are fewer shareholders -- Georgia law provides for a maximum of 50;

  3. The majority of shareholders take part in the daily management of corporate affairs. This makes the adoption of special rules necessary to prevent the majority shareholders from taking advantage of the minority ones;

  4. The shareholders normally enjoy excellent liability protection;

  5. Shareholders exercise significant control over the usually limited shares sold to outsiders.

Disadvantages

  1. Although Georgia law allows the formation of “close corporations,” a small number of other states do not allow their creation. In those situations, the founding members of the corporations just have to have their businesses incorporated in states that do allow closed corporations. Keep in mind that your business will be governed by the corporate laws covering the state where it has been chartered;

  2. It may cost you a bit more to form a close corporation that a more traditional one;

  3. A number of shareholders must be present to help manage the corporation (that’s actually a positive attribute to some);

  4. A comprehensive shareholders’ agreement must be created and executed. Along with the corporation's bylaws, this agreement is the main source of information for how the corporation should be run. These types of documents can be more restrictive than those governing more traditional corporation;

  5. You cannot make a public offering of your stock;

  6. The shares of a close corporation usually have less resale value compared to those of a more traditional corporation.

Additional Facts Regarding Close Corporations

Shareholder voting agreements and voting trusts can play an important role in managing close corporations. Likewise, all holders of stock in a close corporation must be sure they have a thorough understanding of the restrictions often placed on their rights to transfer their shares.

Be sure to ask your Peachtree City business attorney if you have any questions regarding your rights as a shareholder in a close corporation, especially in regards to possible management issues and your right to transfer shares.

To obtain help with handling all of your Georgia business planning needs, please contact the Law Offices of Shane Smith today.  You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.


Shane Smith
Advocate for the Seriously Injured in Georgia