When it comes to forming a business, most advisors point to the LLC or the standard corporation as the go-to options. But there’s an entity that’s been quietly serving small groups of entrepreneurs and family-owned businesses with unique advantages: the Close Corporation. This lesser-known structure combines the liability protections of a traditional corporation with the flexibility and simplicity often associated with an LLC, making it an ideal choice for individuals and tightly-knit teams.

Why haven’t you heard more about it? Likely because it’s not as trendy or straightforward as the LLC, and most advisors don’t take the time to educate their clients on its powerful benefits. At Corvus Networks, we believe it’s time to bring this overlooked entity into the spotlight.

A Brief History of the Close Corporation

The Close Corporation originated in the mid-twentieth century to address the needs of small, closely-held businesses. Legislators recognized that many small business owners wanted the liability protection of a corporation but without the cumbersome formalities of annual meetings, extensive record-keeping, and a board of directors.

Close Corporations were created as a solution-offering corporate protections while eliminating much of the red tape. Over time, they became a preferred option for family-owned businesses, partnerships, and other groups looking for a private, manageable structure that prioritized internal control.

What Makes the Close Corporation Unique?

The Close Corporation is a hybrid entity, blending the best aspects of a corporation and an LLC. Here are the standout features that make it unique:

• Restricted Ownership: Unlike standard corporations, Close Corporations limit the number of shareholders, typically to thirty or fewer, ensuring ownership stays within a small, trusted circle. Shares are not publicly traded, which preserves control and privacy.Practice and SpeakDeliver excellent customer service through various channels, including phone, email, live chat, and in-person assistance at physical locations.
• Simplified Management: Close Corporations can eliminate the need for a board of directors, allowing shareholders to manage the company directly. This reduces administrative burdens and keeps decision-making streamlined.
• Tailored Agreements: Shareholder agreements in a Close Corporation can include restrictions on transferring shares, succession planning, and even operational rules.This level of customization ensures the business operates in line with the founders’ vision.
• Robust Liability Protection: Like a traditional C-corporation, Close Corporations provide a clear separation between the business and its owners, protecting personal assets from business liabilities.

How a Close Corporation Benefits Entrepreneurs

Close Corporations are a game-changer for small groups of entrepreneurs and family-owned businesses. Here’s how they stand out:

• Ironclad Liability Shield: Courts are less likely to pierce the corporate veil of a Close Corporation compared to an LLC, provided the entity adheres to basic governance standards. This means your personal assets are far better protected.
• Flexible Tax Strategies: Close Corporations can leverage the flat twenty-one percent corporate tax rate while avoiding double taxation through strategic “qualified” dividend distributions. Shareholders can receive dividends below the federal threshold— $47,000 in 2024—and pay no taxes on that income.
• Operational Simplicity: By eliminating the need for a board of directors or annual meetings, Close Corporations allow owners to focus on running the business rather than managing formalities.
• Control and Privacy: Ownership remains tightly held within a small group, ensuring no outsider interference. This makes the Close Corporation ideal for family businesses or partnerships with aligned goals.

Close Corporation vs. Standard Corporation

While both entities share liability protections, the Close Corporation offers advantages tailored to smaller operations:

• Ownership: Standard corporations can have unlimited shareholders and issue publicly traded shares, while Close Corporations limit ownership to a small, private group.
• Management: Close Corporations allow direct management by shareholders, unlike standard corporations that require a board of directors.
• Flexibility: Shareholder agreements in Close Corporations can include custom restrictions on share transfers, making them more adaptable to specific business needs.

Close Corporation vs. LLC

Although Close Corporations share some similarities with LLCs, they outshine in several critical areas:

• Liability Protection: The Close Corporation’s liability shield is far stronger, as courts are more likely to uphold its separation between the business and its owners.
• Taxation Flexibility: Close Corporations can retain earnings, strategically distribute dividends, and leverage corporate tax rates—advantages LLCs do not provide.
• Governance: Close Corporations provide a structured yet simplified framework, while LLCs often lack formal agreements, leaving room for disputes.

Similarities:

• Both entities are ideal for small groups or family-owned businesses.
• Both offer flexibility in management, allowing owners to tailor operations to their needs.

Tax Planning with a Close Corporation

One of the standout features of a Close Corporation is its ability to strategically avoid double taxation—a common criticism of standard corporations. Here’s how:

• Flat Corporate Tax Rate: Close Corporations are taxed at the twenty-one percent corporate rate, which is often lower than individual income tax rates.
• Strategic Dividend Distributions: Shareholders can receive dividends below the federal threshold for qualified distributions ($47,000 in 2024) and pay no taxes on that income. This eliminates double taxation while still allowing shareholders to benefit financially from the company’s profits.
• Retained Earnings: Unlike LLCs, Close Corporations can retain earnings within the business for reinvestment or operational expenses. This flexibility allows for growth without immediate tax consequences for shareholders.

Lesser-Known Benefits of the Close Corporation

• Succession Planning: Shareholder agreements ensure smooth transitions in ownership, making Close Corporations ideal for family businesses.
• Enhanced Stability: By restricting share transfers, Close Corporations prevent hostile takeovers or ownership disputes.
• Legal Strength: Courts respect the corporate veil of a Close Corporation more than the informal structure of an LLC, provided governance standards are met.
• Privacy: Close Corporations are privately held, meaning they avoid the public scrutiny faced by larger corporations.

Why Haven’t You Heard About Close Corporations?

Many CPAs and advisors default to LLCs because they’re easier to set up and require less specialized knowledge. But simplicity doesn’t equal suitability. The Close Corporation requires a more nuanced understanding of tax laws, governance, and liability protections— areas where many advisors fall short.

If you’re frustrated that no one has mentioned this powerful entity before, you’re not alone. At Corvus Networks, we believe business owners deserve better.

The Bottom Line

The Close Corporation is one of the best-kept secrets in the business world. Its combination of liability protection, tax flexibility, and operational simplicity makes it a superior choice for small groups or individuals who want a scalable, secure business structure.

At Corvus Networks, we’re here to help you navigate the options that others overlook. If your advisor hasn’t told you about the Close Corporation, it’s time to rethink who you trust with your business. Contact us today to learn how this unique entity can help you achieve your goals with confidence and clarity.