Delaware Close Corporation
- A Close Corporation is a Corporation which sets certain limitations on the sale, holding and transfer of its shares of stock.
- In Delaware, a Close Corporation is limited to thirty shareholders.
- Two common reasons to form a Close Corporation are to seek and maintain “S-Corporation ” tax status from the IRS and/or to ease administration for a small business, frequently a family business.
- Restrictions on the transfer of stock are frequently employed as a way of maintaining S-Corporation tax status; for example: A typical restriction prohibits the transfer of restricted securities to non-resident aliens.
- Another typical restriction, known as “First Refusal” requires a potential seller to offer the stock shares to the Corporation and its existing shareholders before offering the stock shares for sale to anyone else.
- First Refusal can potentially protect shares of a family business from being sold to someone outside the family or shares of an S-Corporation from being sold to a party that would cause the Corporation to loose its “S” status.
How are Close Corporations Managed?
- Close Corporations are not required to hold an annual meeting of the Board of Directors; decisions effecting shareholders can be governed by a “Shareholder Agreement” rather than a Board of Directors.
- A Shareholder Agreement is similar to an Operating Agreement or a Limited Partnership Agreement and defines the specifics of the regulation of the of the company’s business.
- The following information will be included on the Certificate of Incorporation of a Close Corporation :
- The name of the Corporation
- The name and complete address of the Delaware Registered Agent
- The General Purpose of the proposed Corporation
- A statement regarding the Authorized Shares, stating the number of shares authorized with or without par value.
- The name and address of the Incorporator and the name and address of the Initial Director, unless the Certificate is to be Anonymous, in which case the fifth article will only feature the name and address of the Incorporator.
- A statement limiting the number of shareholders to 30
- A statement that the shares of stock are subject to one or more restrictions on the transfer of stock
- A statement that the Corporation will not make public stock offerings.
- The signature of the Incorporator
The specific limitations on the transfer of stock may be made in the By-Laws.
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