Closely Held Companies

Posted in Finance, Accounting and Economics Terms, Total Reads: 1849
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Definition: Closely Held Companies

A closely held company is a company where the majority of shares are owned by a small number of shareholders and generally unavailable to outsiders. The major shareholders tend to hold the stock to them resulting in very thin trade volumes. Closely held companies differ from privately owned companies where the stock is not publically traded. Owing to their concentrated shareholding pattern, closely held companies are much more resistant to hostile takeovers than other companies. Also, they are more stable as their share prices are not affected by investment decisions. However, some of the transactions between major shareholders in a closely held company do not receive the same preferential tax treatment as its actively traded counterparts.


Detailed provisions for the sale or transfer of stock at the time of the death, disability, or retirement of a shareholder are generally put in place in a closely held firm as the departure of one major shareholder could bring about the end of the business. Shareholder Agreements allow co-owners to buy out heirs or other shareholders in the event of death or disability and thus protect control of the company.


Example: A classic example of a closely owned company are family businesses where more than 50% of the shares are owned by few members of a family who control the operating policies by holding preferential voting rights and higher management positions.

 

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