In the realm of business entities, closely held businesses play a unique role. They are often the preferred choice for entrepreneurs and small business owners looking to maintain control over their operations while limiting their exposure to outside investors. In the following post, we will explore what closely held businesses are, their key characteristics, and whether or not you need one for your entrepreneurial venture.
What is a Closely Held Business?
A closely held business, also known as a closely held corporation or closely held company, refers to a type of business entity in which a small group of individuals or a single family holds a significant portion of the company’s ownership and maintains close control over the company’s management and operations. Closely held businesses can take various legal forms, including:
- Closely Held Corporations: These are corporations with a limited number of shareholders, often family members or a small group of investors, who usually participate in the company’s day-to-day operations and decision-making processes.
- Limited Liability Companies (LLCs): In many jurisdictions, LLCs can also be closely held businesses, where a few members have significant control and ownership stakes.
Key Characteristics of Closely Held Businesses
To better understand whether you need a closely held business, it’s essential to grasp their defining characteristics. These characteristics are:
- Ownership Concentration: Closely held businesses are characterized by a limited number of shareholders, which may include family members, friends, or a select group of investors. This contrasts with publicly traded companies where ownership is distributed among numerous shareholders.
- Management Control: In closely held businesses, shareholders often have a direct hand in managing the company’s affairs. They may serve as officers, directors, or executives, allowing for a more hands-on approach to decision-making.
- Less Regulatory Oversight: Compared to publicly traded companies, closely held businesses typically face fewer regulatory requirements, such as financial disclosures and reporting obligations to government agencies.
- Long-Term Perspective: Closely held businesses tend to focus on long-term sustainability rather than short-term profit maximization, as the owners often have a vested interest in the company’s success over generations.
Do You Need a Closely Held Business?
Now that we understand what closely held businesses are, let’s consider whether you need one for your entrepreneurial endeavors. The decision to establish a closely held business depends on various factors. These factors include:
- Control Preference: If you prefer maintaining tight control over your business’s direction and decision-making processes, a closely held business structure may be suitable. It allows you to make decisions without the influence of outside shareholders.
- Ownership Structure: If you plan to start a business with a select group of partners, family members, or investors and want to allocate ownership shares accordingly, a closely held structure may be more appropriate than a publicly traded entity.
- Desire for Privacy: Closely held businesses often enjoy greater privacy since they are not subject to the same level of public scrutiny as publicly traded companies. If you value confidentiality, this structure might be preferable.
- Long-Term Vision: If you’re focused on building a legacy business that can be passed down through generations, a closely held business allows for greater continuity and family involvement.
- Tax Considerations: Closely held businesses may offer specific tax advantages, depending on your jurisdiction and individual circumstances. Consult with a tax advisor to determine the best structure for your tax goals.
Contact The McWilliams Law Group for Help
When you are ready to open a new business or take your current business to the next level, the lawyers at The McWilliams Law Group are here to help. We can help ensure that your operations provide you with the tax and liability protections that best fit your short- and long-term plans. Our attorneys work closely with business owners throughout Washington and California, providing individualized and strategic advice to help their businesses run smoothly. Contact us now and get the skilled business advice that you deserve.
