Forming a company brings numerous benefits, including but not limited to risk management, tax minimization, privacy and increased proffesionalism. Less frequently mentioned are the downsides. Namely, the increased bureaucratic necessities. Close LLCs and Close Corporations help you avoid this red tape. Close companies are intended for:
- Single owners
- Small groups who know each other well.
Formalities are unnecessary when you’re the only owner, or other owners are family members and close associates. Why hold a formal “annual meeting” when you already meet and converse with other owners on a frequent basis? Or even odder, when you’re the only owner? That sounds a lot like talking to yourself.
Reduced corporate formalities
Restrictions on share transfers and sales.
A maximum of 35 shareholders or members is allowed.
Annual meetings are not required.
Regular meetings are not required.
Material decisions and changes do not require a formal vote.
Information does not have to be dispensed via formal means – e.g. in writing or by certified mail.
Corporations can be run as partnerships, e.g. no board of directors and everything can be run through a shareholder agreement.
Reduced access to capital because of 35 shareholder limit.
Share Transfer Restrictions – Benefit & Drawback
Selling shares to a non-owner requires you provide existing share-holders a right of first refusal. This makes it harder to sell your shares, but means you are protected from a third party unexpectedly seizing control of the company’s affairs via a “hostile takeover”. This can also be useful for family run businesses who don’t want their children to sell to outsiders without permission. Also, deceased owner shares must be offered to existing owners first.
Single member LLCs and 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 incresed compliance costs.Learn more about single member LLCs here. When there are multiple owners, though, the answer varies. The question comes down to how well the owners know and trust one another. It is also important to note close companies do not allow for more than 35 owners. If you intend on going public then this option is not for you.
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?
Companies may switch from being a close company to a traditional, or vice-versa, at anytime. It is however advisable to choose the one you prefer from the beginning to avoid requiring a vote. There are restrictions on share sales and transfers of membership interests to be mindful of. These restrictions are viewable as either an additional benefit or a drawback depending upon your situation. These are irrelevant to a single-member LLC.
History of Close Companies
This structure arose through the realization some small groups didn’t require the protections and oversight necessary for other companies. For example, businesses owned by a close group such as a family. In such an instance it is assumed the group is kept well aware of the companies affairs due to the owners relationship to one another. The owners are in constant contact and trust one another. 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. Thus the close designation was born.
What doesn't change?
All the typical qualities of an LLC and Corporation remain the same when you elect for the close designation. We still only charge $199 to handle the filing and your annual fees are the same. Wyoming Limited Liability Companies are anonymous and C-Corps can elect for a nominee officer. For a full discussion of Wyoming LLC benefits click here, and for Wyoming Corporation benefits click here.
Alternative names include: Some refer to a Close Corporation as a "Closed Corporation" or a "limited liability company where all the participators are directors".