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What Is a Close Corporation in California

What Is a Close Corporation in California?

A close corporation, also known as a closely held corporation, is a type of business structure that is commonly established by a small group of individuals who have a close relationship with each other. In California, close corporations are governed by specific laws and regulations that provide flexibility and certain advantages for shareholders.

Close corporations are typically formed by family members, friends, or business partners who want to maintain a high level of control and privacy over their business operations. Unlike publicly traded corporations, close corporations have a limited number of shareholders and their shares are not publicly traded on stock exchanges.

In California, close corporations are governed by the California Corporations Code, Sections 200 through 204. These sections provide specific rules and regulations for close corporations, including the requirements for formation, shareholder rights and obligations, and corporate governance.

Requirements for Formation:
To form a close corporation in California, certain requirements must be met. These include:

1. Limited number of shareholders: A close corporation must have no more than 35 shareholders. This limitation ensures that the corporation remains closely held and allows for more effective decision-making among shareholders.

2. Shareholder agreement: A shareholder agreement, also known as a buy-sell agreement, is a crucial document for a close corporation. This agreement outlines the rights and obligations of shareholders, including the transferability of shares, restrictions on the sale of shares, and procedures for resolving disputes.

3. Articles of Incorporation: Like any other corporation, a close corporation must file Articles of Incorporation with the California Secretary of State. These articles contain basic information about the corporation, such as its name, purpose, and registered agent.

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Advantages of a Close Corporation:
There are several advantages to forming a close corporation in California. Some of these advantages include:

1. Limited liability: Shareholders of a close corporation are generally not personally liable for the debts and obligations of the corporation. This means that their personal assets are protected in the event of a lawsuit or business failure.

2. Flexibility: Close corporations have more flexibility in terms of corporate governance and decision-making. Shareholders can tailor the corporation’s bylaws to fit their specific needs and goals, allowing for more efficient management.

3. Privacy: Unlike publicly traded corporations, close corporations are not required to disclose detailed financial information to the public. This level of privacy can be beneficial for businesses that want to maintain confidentiality regarding their financial affairs.

Frequently Asked Questions (FAQs):

Q: Can a close corporation have only one shareholder?
A: Yes, a close corporation can have a single shareholder. However, it must still comply with other requirements, such as having a shareholder agreement and filing Articles of Incorporation.

Q: Can a close corporation convert to a different type of business structure?
A: Yes, a close corporation can convert to a different type of business structure, such as a regular corporation or a limited liability company (LLC). The conversion process involves filing the necessary documents with the California Secretary of State.

Q: Are close corporations required to hold annual meetings?
A: Close corporations are not required by law to hold annual meetings unless specified in their bylaws or shareholder agreement. However, regular communication and decision-making among shareholders are essential for the effective operation of the corporation.

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Q: Can close corporations issue shares to the public?
A: No, close corporations cannot issue shares to the public. The shares of a close corporation are usually restricted and can only be transferred among existing shareholders or with the approval of other shareholders, as specified in the shareholder agreement.

Q: Can close corporations have outside investors?
A: Close corporations can have outside investors, but the number of shareholders must not exceed 35. It is important to note that the close relationship among shareholders is a defining characteristic of this business structure.

In conclusion, a close corporation in California is a business structure that provides flexibility and advantages for a small group of shareholders. It allows for more control, privacy, and tailored corporate governance. By adhering to the specific requirements and regulations, close corporations can operate effectively and protect the interests of their shareholders.

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