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.

Related Topics

• Corporate Governance Law (Intro)
• What is Business Governance?
• Berle-Means Thesis 
• Corporate Governance Rating Definition
• Who are the members of a corporation?
• Corporate Charter
• Shareholder Register
• Common Stock
• Preferred Stock
• Par Value
• Authorized Shares
• Issued Shares of Stock
• Unissued Shares of Stock
• Outstanding Shares
• Institutional Shares
• Dual Class Shares
• What is a closely-held corporation?
• Close Corporation Plan Definition
• What is a Private Company vs a Public Company?
• What is the role and purpose of the corporation?
• What is the Agency theory of corporate governance?
• Shareholder-Centric Perspective
• Shareholder Value
• What is the Stakeholder theory of corporate governance?
  
• What is the role & rights of Shareholders in the corporation?
  
• Shareholder Democracy Definition
• Quorum Definition
• Information Circular
• Straight and Cumulative Voting
• Statutory (Straight)
  
• Cumulative Voting
• Plurality Voting
• Class Voting Shareholders
• Changing the Voting Rules
• Supermajority (Voting)
• Shareholder Sponsored Proposal 
• What are the variations on attributes of Ownership structure?
• Stock Split
• What are the fiduciary duties owed by shareholders?
• When is a shareholder personally liable for corporate obligations?
• Appraisal Rights
• Dissenter's Rights
• Say on Pay Rights
• How can shareholder enforce their rights (direct and derivative actions)?
• Amotion
• What is the process for bringing a Derivative action?
• What are corporate vote Proxies?
• Proxy Statement
• Proxy Fight or Contest Definition & Explanation 
• What is Shareholder Activism and the significance of Institutional Investors?
• Activist Investor
• Overview of Board of Directors
• Board Decision Making
• Advisory Board (Observer Directors)
• What is the role of the Board of Directors?
• Board of Trustees
• Board of Governors
• What is the composition of the board of directors?
• Chairman of the Board
• CEO as Chairman of the Board
• Inside Director
  
• Outside Director
• Outside Director or Non-Executive Director Definition
• Independent Outside Director
• Budget Committee
• Audit Committee
• Compensation Committee
• Nomination Committee (Corporate Board)
• What standards govern the actions of the board of directors?
• Duty of Candor Definition
• Duty of Care (Board of Directors)
• Duty of Loyalty (Directors) 
• Self-Dealing
• Board Evaluation Definition
• What is the Business Judgment Rule?
• What is D&O insurance?
• Codetermination (Foreign)
• What is the role of Managers of the corporation?
• What standards govern manager actions?
• Chief Executive Officer (CEO)
• Chief Financial Officer
• Chief Information Officer (CIO)
• Chief Investment Officer (CIO)
• Chief Legal Officer
• Chief Operating Officer
• Chief Risk Officer
• Chief Security Officer
• Chief Technology Officer (CTO)
• What are the primary state and federal corporate governance laws?
• What is the role of the state in corporate governance?
• What is the role of Securities Laws in corporate governance?
• What is the role of the Foreign Corrupt Practices Act in corporate governance?
• What is the Sarbanes-Oxley Act (SOX) effect on corporate governance?
• Sarbanes-Oxley Act (SOX)
• What is the Dodd-Frank Wall Street Reform and Consumer Protection Act effect on corporate governance?
• Corporate Monitors
• What industry organization standards affect corporate governance?
• How do proxy advisory firms affect corporate governance?
• What is the role of ethics in corporate governance?
• What are the major causes of corporate governance issues?
• What are the access to information issues?
• What are decision-making structure issues?
• What are the power struggle or competition issues?
• Holding Company
• What are hostile takeovers and defenses to hostile takeovers?
• Williams Act
• Staggered Board
• Shark Repellent Defenses?
• Poison Pill Defenses?
• Flip Over Poison Pill Definition
• Flip In Poison Pill Definition
  
• Voting Poison Pill Plan
• Delay-Tactic Defenses?
• Legal Lockup Defenses?
• White Knight and Pac Man Defenses?
• Jonestown Defense
• Lady Macbeth Strategy
• Macaroni Defense
• Yellow Knight
• Back-end Plan Definition
• Backflip Takeover Definition
• Dead Hand Provision Definition
• Kamikaze Defense
• Operating Company Property Company Model
• Whitemail
• Scorched Earth Policy Definition
• Revlon Rule
• What are benefit-alignment issues?
• Cadbury Rules Definition