Business Lawyer: Essential Characteristics of Closely Held Corporations

Most small business lawyers in St. Paul deal with closely held corporations. In order to understand this form of business entity, it is useful to explore the essential characteristics shared by the predominant majority of closely held corporations. The purpose of this article is to provide a general overview of the four most common characteristics of a closely held corporation.

1. No Public Ownership of Stock

This characteristic is present in almost every closely held corporation. Lack of “public ownership of stock” usually means that the stock of a closely held corporation has never been sold in a public offering (as this term is used in connection with Securities and Exchange Act of 1933 and similar state statutes). It may also mean that the stock of a closely held corporation is not listed on any stock exchanges or otherwise regularly traded. The corollary of this characteristic is that it is often very difficult to determine the value of a closely held corporation’s stock.

2. Closely Controlled by Few Shareholders

It is very common for a closely held corporation to be controlled by one individual, a single family, or a small group of shareholders. This characteristic also holds true even where a large percentage (yet less than controlling share) of a corporation’s stock is owned by a public shareholder, while the controlling number of shares is in the hands of an individual or a private group of shareholders. In such atypical cases, closely held corporations are often being singled out for special tax treatment. The converse of this reality is that the present of a public shareholder may reduce substantially many of the tax problems (for example, in the are of the tax on accumulated earnings).

3. Management by Owners

In a closely held corporation, the shareholders and the operating executives are often the same individuals. Moreover, in many cases, the stock held by these individuals is not merely an investment, but rather the principal source of income.

4. Restricted Ownership

Closely held corporations are also often “closed” corporations. This means it is often difficult for an outsider to obtain stock in a closely held corporation, and it is difficult for a current shareholder to sell stock except to other shareholders or the corporation itself. Very often, this situation arises intentionally as part of the legal structure of the corporation as defined by the Shareholder agreements.


As one see, usually a closely held corporation is generally a corporation that is owned, controlled and managed by a few private shareholders; the stock of such corporation is neither traded frequently nor listed on any of stock exchanges. These are obviously only the most common characteristics. There plenty of variations which may also be classified as “closely held corporations”, but even these variations usually share most of these common characteristics.