A close corporation is a non-publicly traded corporation with a limited number of shareholders. The benefit of a close corporation is that shareholders have more flexibility when managing the day-to-day affairs of the business in comparison to a conventional corporation. With a close corporation, the normal corporate formalities can be waived, which allow the shareholders to act in a decentralized fashion. Close corporations are subject to state law, so standards will vary.
Choose a state in which to incorporate. Generally, a small business should incorporate where it is headquartered, because it is generally cheaper and requires less paperwork to do so. If you want to consider incorporating in another state, evaluate the cost of incorporating in another state versus incorporating in the state where the business is located, the tax structure of both states and the business laws in both states.
Read More: What Document Is Necessary to Form a Corporation?
Check the incorporating state’s requirements for close corporations. Some states have special legal restrictions on how a close corporation can be formed. Generally these provisions require that the corporation state in its articles of incorporation that it is close, that the number of shareholders is limited to 30 to 50 people, and that there are restrictions on the transfer of shares.
Check name availability. Corporations are generally not allowed to have the same name as another incorporated business in the same state. Most states provide online corporate name databases on their secretary of state’s website. Search the database of your incorporating state to ensure that no one else has already taken your corporation’s name. If someone has taken your name, you will need to change yours.
Choose a registered agent. A corporate registered agent is the person who receives all legal papers involving the business. If the corporation is sued, it is the registered agent who gets served. Appoint either a member of the board, a high rank corporate officer or your corporation’s attorney as the registered agent. (Reference 5).
Complete the articles of incorporation. The articles of incorporation detail the business’s name, purpose, and the number of shares issued. The articles of incorporation will have to include any language required by your state’s law regarding close corporations. The name of the registered agent is included on the articles of incorporation as well. You may be able to get a blank form to fill in for the articles of incorporation from the incorporating state’s secretary of state.
Draft a shareholders’ agreement. A shareholders’ agreement is a contract that requires the shareholders to sell their shares back to the company if they want to leave the business. This agreement may need to be included with the articles of incorporation, depending on the close corporation requirements of the incorporating state.
File articles with the incorporating state. Generally the articles are filed with the incorporating state’s secretary of state.
Drafting an effective shareholders’ agreement for a close corporation may be difficult and costly.
Consider filing for S corporation status with the IRS. Consider using an online third- party document provider or a licensed attorney to help you prepare the necessary documents.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.