Closely Held Corporation Flashcards, test questions and answers
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What is Closely Held Corporation?
A closely held corporation is a type of business entity in which the majority of ownership shares are owned by a small group of individuals, usually family members or friends. The owners have close control over the company and its operations, which gives them significant influence. Unlike publicly traded corporations, a closely held corporation does not offer shares to the general public; instead, ownership is restricted to those within the inner circle.Advantages of a Closely Held Corporation:1. Tax Advantages: A closely held corporation offers many tax advantages that other types of businesses lack such as pass-through taxation and limited liability protection for shareholders. Pass-through taxation allows profits and losses to be reported directly on the personal income tax returns of shareholders without having to pay corporate taxes first. This can be beneficial if there are large losses incurred during certain years as it reduces their taxable income for those years. Limited liability protection shields shareholders from being personally liable for business debts and liabilities beyond their investment in the company. 2. Flexibility: Closely held corporations have greater flexibility when it comes to decisions like salaries, dividend distributions and voting rights than larger companies with more publicly traded shares do since they’re only answerable to an exclusive group of people who can agree or disagree with proposed changes depending on what’s best for all involved parties. This approach also helps ensure that all shareholders are kept informed about important decisions quickly since they’re made in-house rather than needing approval from outside investors or regulatory bodies like with public companies do which requires more time and effort before a decision is made finalised. 3. Continuity: Since ownership isn’t subject to change due to external forces such as stock market fluctuations or new investors entering / leaving, there is greater continuity within closely held corporations compared to other businesses models where changes in leadership may occur often due to external circumstances. This helps ensure that direction remains consistent over time and allows current owners peace of mind knowing that their investments will remain safe regardless of any external issues affecting other businesses around them. Disadvantages Of A Closely Held Corporation:1) Limited Resources: Due to the small size nature of most closely held corporations, these entities typically lack access resources needed for growth opportunities such as venture capital funding or access large loan options available through banks or external investments firms. Without access these resources , expansion plans may be hindered significantly limiting potential future revenues streams offered through increased sales volumes etc.