Delaware Close Corporation: Important Things To Know

Are you planning to form a Delaware close corporation? Smaller firms can benefit from this corporate status since it frees them from many rigid requirements that apply to traditional corporations. You can find everything you need to know about this business form in this article.

What is a Delaware close corporation?

A close corporation is considered a statutory entity that is held by a limited number of shareholders (no more than 30 shareholders, excluding treasury shareholders) and is not publicly traded.

Close corporations in Delaware can be exempt from many corporate requirements and formalities, such as holding annual meetings to elect a board of directors.

You can set up and run your close corporation similar to a Limited Liability Company (LLC) or a Limited partnership in terms of management, profit allocation, official choices, or partners/shareholders recruitment.

The tax status of your close corporation can be determined by choosing between a C Corporation and an S Corporation. Relevant tax rules would be applied based on your preferred tax designation.

It should be noted that a close corporation is not always a good option for businesses. If significant amounts of capital are required in the future, you may need to change the structure of your company to obtain additional funding. A close corporation, in general, can only accept investments from its shareholders.

Yet, there are significant advantages, such as no public information about shareholders, company value, or employee count.

Advantages and disadvantages of a close corporation

Advantages

Below are the main advantages of this business type.

• Simpler overall operation: In such private companies, those in charge of the business are more active in day-to-day operations. So, there isn’t a disparity between the business goals.

• Fewer formalities: There are fewer regulations to follow. Still, the owners must follow the rules for submitting incorporation documents.

• Restricted liability: The shareholders are not personally responsible for the debt of the company. Still, there are some exceptions, such as where a shareholder has consented to accept personal liability for the company’s debts.

• Greater freedom: The owners are not under as much supervision from the board of directors as in traditional businesses. They can run the corporation how they want, such as targeting new markets, exploring new strategies, and so on.

• More control over shares: When and how shares are sold to outside investors is largely under the hands of shareholders.

Disadvantages

Still, there are a few shortcomings that you should be aware of before choosing this corporate structure. Some may include:

• Not all states permit close corporations. So if you want to move your close corporation to another state, choose the one that recognizes this business form. In this case, you need to file for a continuation certificate and formation document certified copy.

• Organizing a close corporation frequently costs more money. Thus, it places more financial problems and responsibility on its owners. For more detailed information, here is the list of corporate fees.

• A private corporation is prohibited from selling its stock to the public, which may have an impact on the company’s total value and cash flow.

• A close corporation’s resale value is frequently lower than it would be for a regular business.

Apart from the close corporation, there are many types of businesses in Delaware, and each has its pros and cons. For further information, read the article about common business entity types in Delaware.

Close corporation vs general corporation

A close corporation is a corporate status that is frequently misunderstood. Some call it a “closed” corporation; however, this is incorrect.

Others refer to it as a C corporation; however, the “C” here does not imply “Close”, so C corporation is NOT an abbreviation of Close corporation.

What is the primary distinction between a close corporation and a general corporation? The following are some of the main differences:

• Certificate of Incorporation for Close Corporation

A close corporation has a certificate of incorporation, whereas a general corporation does not.

To see a sample of this certificate, click here.

• Sell and distribute shares

A general corporation can have more than 30 shareholders (excluding treasury shareholders). This number is not only limited to a close corporation but there are also limitations on the transfer or sale of stock.

Plus, the Right of First Refusal provision may impose limitations on the transfer or sale of stock in a close corporation to a third party (instead of other shareholders). Meanwhile, this privilege is absent from general corporations.

• Suitability

The general corporation is typically the business entity type chosen by those seeking to generate capital and draw investors. Meanwhile, the close corporation is the sensible, strategic choice for small, close-knit families, groups, or one-person firms.

• Annual meeting requirements

General corporations are required by state law to hold annual shareholder meetings to elect directors and discuss business matters. The board of directors will also meet more frequently, whether quarterly or monthly.

Close corporations, on the other hand, do not need to hold an annual meeting to appoint directors.

Conclusion

We have explained all the information you need to know about the Delaware Close corporation. This business status has some outstanding benefits alongside some disadvantages, so you should consider each factor carefully before deciding whether to establish one.

Our friendly consultants can provide helpful guidance for any difficulty you may encounter with this type of corporate status, simply drop us a message via service@bbcincorp.com and we’ll get in touch the soonest.