What is the difference between an Open & Close Corporation?

An Open corporation provides stock that the general public can readily purchase. It may have one shareholder or a group of shareholders. The shareholder(s) owning more than 50% of the shares will control corporate policy and activities through their presence or representation, through proxies, on the board of directors.

A Close corporation (either C or S type), as defined by Delaware Corporation Law, is one in which all of its issued stock of all classes, exclusive of treasury shares, shall be represented by certificates and shall be held of record by not more than a specified number of persons not exceeding thirty (30).

The stock of a Close corporation also shall be subject to restrictions of stock transfer, such as a first-refusal option requiring that, should a shareholder elect to sell, the stock must be offered to the corporation or to any other holder of securities in the corporation. These restrictions can be defined in the original bylaws or adopted as a later amendment to the bylaws by a majority vote of the shareholders.

A typical restriction prohibits the transfer of restricted securities to non-resident aliens in order to protect and maintain a corporation’s status as an S corporation under the U.S. Internal Revenue Federal Tax Code.

If you wish to elect S corporation status, you may wish to incorporate as a Close corporation and include this restriction, which will prevent possible automatic loss of your corporation’s S status.