Close Corporation Plan - Explained
What is a Close Corporation Plan?
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Table of ContentsClose Corporation Plan DefinitionA Little More on What is a Close Corporation PlanElements of a Close CorporationSetting Up a Close CorporationAcademic Research
What is a Close Corporation Plan?
A close corporation plan refers to a set of agreements that guide a closely-held company's operation and ownership structure. This plan outlines ways to fund the corporation, how shares can be purchased by shareholders, the price of shares held by shareholders, and other plans to prevent outsiders from gaining access to the shares of the company.
How is a Close Corporation Plan Used?
A close corporation is a type of corporation held by a limited number of directors and shareholders and can be run as a partnership. This kind of corporation is not one that is easily traded given that there is a buy-sell plan that prevents competitors from being able to purchase the corporation. A close corporation is held and run by a few selected individuals who are the shareholders of the business. In a close corporation, for instance, a plan exists which stipulates that the shares held by a deceased shareholder must be purchased by the surviving partners to prevent competitors from gaining access to the corporation. Close corporation plans refer to rules governing the corporation. These plans are commonly backed by life insurance policies and can take two forms which are cross-purchase agreement and stock redemption plan. In a cross-purchase agreement, each of the partners owns policy but in a stock redemption plan, the Corporation owns a single policy on all shareholders.
Elements of a Close Corporation
In a close corporation, shareholders are the owners of the business, they hold the shares of the corporation and at the same time run its affairs. These owners maintain a level of control over the business and have rules that guide business operation including stock purchase. Close corporations are otherwise called tightly-held corporations and these corporations have core elements which include;
- A close corporation maintains a tight-knit group where each shareholder has roles that often overlap.
- Membership of a close corporation is limited to 30 shareholders.
- There are agreements that prohibit the transfer or sell the shares of the company by an existing shareholder.
- Close corporations are exempt from certain regulations including holding an annual board of directors meetings.
- A close corporation does not hold a public stock offering.
Setting Up a Close Corporation
Setting up a close corporation is often easy, as long as the corporation exhibits the core elements listed above. To set up a close corporation, it must be registered with the IRS as a C or S corporation having met the required procedures. Close corporations are often used as family ventures or by small business owners as it offers some benefits and is free from certain restrictions. Different Laws exist in different states that guide how close corporations can be set up. Filings of these corporations can also vary from state to state.
Academic Research on Close Corporation Plans