Companies adhere to one business entity. Usually, that means they are a partnership, limited liability company, or corporation. But there are variations even among the basic business structures. For example, you could be a limited partnership or a limited liability limited partnership. When it comes to corporations, you could be a C-corporation or an S-corporation. However, there’s another important distinction. Are you a closely-held corporation?
We’re going to look at IRS guidelines and other factors that could help you tell the difference. For more in-depth analysis, talk to a Florida business lawyer.
IRS Guidelines for Closely-Held Corporations
According to the IRS, a closely held corporation:
- “Has more than 50% of the value of its outstanding stock owned (directly or indirectly) by 5 or fewer individuals at any time during the last half of the tax year, and
- Isn’t a personal service corporation.”
For tax purposes, closely-held corporations face tax treatment limitations on “passive activity losses, at-risk rules, and compensation paid to corporate officers.”
Also, a “personal service corporation,” as defined by the IRS, provides services in fields like:
“accounting, actuarial science, architecture, consulting, engineering, health, law firms, and the performing arts.”
IRS Publication 542 also contains specific rules about this type of entity.
How to Tell If You Have a Closely-Held Corporation
If you aren’t sure whether you fit the definition for closely-held corporations, consider the following questions:
- Shareholders. Are you publicly listed but have a small number of shareholders? Do five or fewer individuals own at least 50% of the stock? Is the company controlled by a small number of shareholders who own the majority of shares. If the answers here are yes, your corporation might be considered closely held.
- Stocks. Do your share prices remain fairly stable? Then your corporation might meet another test to be considered closely-held. However, you are probably not closely held if your shares are publicly traded.
- Services Offered. Are you a personal service corporation? If so, then your company does not fit the “closely-held” criteria.
As mentioned above, we encourage you to discuss your corporation with a business lawyer before assuming your company is closely held.
Why does the designation “closely-held” matter?
In this type of corporation, shareholders often exert more control over operations because they hold most of the shares. The company might be able to operate as an S-corporation, which allows for more favorable tax treatment.
One disadvantage is that shareholders might have trouble selling their shares. The company itself might have trouble raising capital.
It’s best if you consider all the pros and cons of the closely-held corporation before choosing to operate as one.
Call to Discuss Your Closely-Held Corporation
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.