If ever there was a misunderstood business entity, it is the nearby corporation. Most people have heard of them but have no idea what they are. Well, the answer is quite simple.

First of all, a closed corporation is not a business that has been closed. The name suggests it, but such an interpretation is somewhat incorrect. The close element refers to the number of shareholders of the entity. Specifically, there is a cap on the number of people who can have a shareholding, namely the number of shareholders. This number varies from state to state, so you’ll have to look it up. The secretary of state often has a website and provides such information.

There are many advantages to a closed corporation. For small businesses, one of the best is that corporate formalities are often ignored, meaning no need to hold board meetings and such. Another advantage is the ability to restrict share sales, allowing you to avoid a situation where a shareholder sells his shares to someone he doesn’t know and doesn’t want in the business.

It is important to understand that the close corporation designation is not permitted in all states. States like California allow their formation, while other states do not. Assuming you can form one in your state, you should read the applicable rules in your state. In general, you should find that there is a limit to the number of shareholders. Usually this is not a big deal because the limit is usually 30 or more shareholders. This means that most small businesses can become close corporations without a problem.

A secondary issue you will need to address is the training process. The closed corporation designation is one made with the state, specifically the Secretary of State. The Clerk usually has very specific rules about how the appointment should be made. Obviously, such rules differ from state to state, but he often has to put the designation on the original articles of incorporation one way or another. Again, he should read up on the specific requirements for his status.

The closely held corporation can be a great way for the little one to benefit from relaxed corporate rules, while gaining the liability and debt protection afforded to large multinational corporations. If you are considering incorporating, this could be the perfect option for your business.