Corporation Owned by a Limited Number of Shareholders: Description, Classification, and Illustrations
A closely held corporation, also known as a closed or privately held firm, is a business with a minimal number of shareholders that primarily own its stock. These shareholders are usually a collection of family members, investors, or business insiders, and can also include the general public under certain conditions to maintain publicly traded status.
Unlike stocks of corporations with actively traded stocks, the shares of closely held companies are rarely traded on the open market, leading to more stable share prices and less liquidity. As a result, they may experience more volatility due to fewer outstanding shares.
The process of how closely held corporations shares are priced might be done by the founders and is often based on the amount of capital raised and the number of shares issued. These entities sometimes have fewer opportunities to raise capital when compared to public companies due to the restriction on trading their stock.
It can be challenging to estimate the company's value due to the restricted access to information. This is particularly true when no shares are available on the open market. The lack of tradability also makes it more difficult for a hostile takeover to occur since a controlling interest via equity would be hard to obtain.
Upon reviewing the tax treatment of closely held corporations compared to those with actively traded stocks, the differences stem from ownership concentration, voting control, and specific Internal Revenue Code (IRC) provisions. For closely held corporations, the at-risk rules often lead to limitations on the amount of investment tax credits (ITCs) a taxpayer can claim, and certain losses may be disallowed. In contrast, corporations with actively traded stocks have fewer restrictions on stock transactions and simpler tax treatment for sales or transfers of shares due to their dispersed ownership and market-based stock valuation.
- Some investors might consider DeFi (decentralized finance) for better liquidity and less volatility, as its decentralized token-based systems often offer more frequent trading opportunities compared to the shares of closely held corporations.
- In the world of cryptocurrency, Initial Coin Offerings (ICOs) have emerged as a new method for businesses to raise capital, potentially providing an alternative financing solution for closely held corporations that struggle with limited trading opportunities.
- As the business landscape evolves,closely held corporations might explore new strategies for maintaining liquidity, such as collaborating with Decentralized Autonomous Organizations (DAOs) that focus on trading and finance.
- In the long run, closely held corporations could find it beneficial to diversify their investing portfolio to include areas like Defi, ICOs, and other innovative finance solutions that may offer more flexibility and liquidity for businesses.
