A few months ago, we wrote a post about closely held businesses and we defined what this type of business is. Closely held businesses are essentially private businesses that have a very limited number of shareholders. Since it is “closely held,” such a business can’t go public and shareholders would not sell their shares (if they even wanted to in the first place) on a stock exchange.
The closely held business offers many benefits as a business structure. First, it limits the number of shareholders and it also limits how ownership is transferred. Since shares cannot be publicly traded, a closely held business is often a great format for family businesses, ensuring that there is a succession plan for the family and the business by limiting people in their ways to sell shares.
Closely held businesses often foster an atmosphere where disagreements can be settled and handled without legal action. Since the selling of shares is limited and since closely held businesses are often couple with shareholder agreements that define how conflicts are handled, it is uncommon for disputes to cause serious legal action.
Another benefit of the closely held business is that even minority shareholders are supported by state laws. Though the majority shareholders will still have power, the minority shareholders have rights under state laws that allow them to object to fraud or mismanagement.
The closely held business is an important type of business, and there are many advantages and disadvantages to it — just as there are for any business structure. Knowing these advantages and disadvantages is crucial to your company’s success.
Source: Smart CEO, “The closely held business: Advantages and traps for the unwary and how to resolve them,” Donnelly Ritigstein, Accessed Oct. 5, 2016