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What is a closely held company?

There is no precise definition of a closely held company. Usually, a “close corporation” or a “closely held” business is one with only a handful of owners. Oftentimes, a closely held company is one owned by a family or by a few partners. Most small businesses are closely held companies, but the size of a company does not determine whether it is “closely held.”Even some large, multi-billion dollar enterprises like Publix Super Markets, Cargill, Inc., and Chick-fil-A are designated by some as “closely held.”The shares or membership units are not publicly traded, and the company is not registered with the SEC.

Different jurisdictions may have varying definitions of what exactly constitutes a closely held company. Florida, for instance, does not recognize any distinction between a “corporation” and a “close corporation.”Nevertheless, in corporations with fewer than 100 shareholders, Florida law allows the shareholders to change the corporate structure by contract.See § 607.0732, Fla. Stat. Delaware, by contrast, has a whole section of its corporate code devoted to “close corporations,” which it defines as corporations with fewer than thirty shareholders. While not explicitly labeled as “closely held,” most LLCs are, in fact, closely held companies. LLCs are modeled after partnerships, where a limited number of individuals share in the ownership and management of the business.

It is important to check the law of the state of incorporation to determine whether designating an entity as “closely held” has any legal significance. In Florida, for instance, the courts have treated closely held LLCs no different than LLCs with many members. Other states may impose additional duties between members in a closely held LLC.

Note also that the IRS has its own definition of a “closely held corporation” for tax purposes that is different from the definition used under most state laws. The IRS generally defines a closely held corporation as a corporation where more than half of the corporation’s stock is owned by five or fewer individuals during the second half of a calendar year.

Please Note: Rabin Kammerer Johnson provides these FAQ’s for informational purposes only, and you should not interpret this information as legal advice. If you want advice as to how the law might apply to the specific facts and circumstances of your case, please contact one of our attorneys.

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