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The Statutory Close Corporation When choosing an organizational form, special note should be made of a particular type of corporation--the statutory close corporation. In a strict sense, a corporation that is regulated by a special state law. This statute, a supplement to a state's regular corporation statutes, governs most of the operations of this type of corporation. The close corporations statutes relax many of the formalities normally applicable to a corporation. Basically, these statutes allow the corporation to be operated in a way similar to an limited liability company (LLC). The statutory close corporation may do away with a board of directors. Generally, shareholders do not have to hold meetings. Shareholders can run the corporation, by way of a shareholder agreement, which is similar to an LLC or a partnership operating agreement. Shareholders can agree to have one vote per person, as in a partnership, as opposed to one vote per share, if they so desire. By contrast, in a regular corporation, directors and shareholders must hold regular meetings. Formal requirements exist regarding notice, quorums, waiving meetings, etc. The elimination of these and other formalities by the statutory close corporation statutes has important protection implications. The statutory close corporation shares this advantage with the LLC. Nevertheless, in very limited cases, a corporation may offer advantages over the LLC in terms of self-employment tax and possibly fringe benefits. Therefore, if you do intend to form a corporation, generally you should form it as a statutory close corporation. (An exception to this rule is the business owner who intends a broad-based public offering of securities or one that will exceed the 30 or 50 shareholder limits in effect in the states' statutory close corporation statutes). The following jurisdictions recognize the statutory close corporation: Subject to update, States Allowing Statutory Close Corporations Alabama Kansas South Carolina Arizona Maryland Texas Delaware Missouri Vermont District of Columbia Montana Wisconsin Georgia Nevada Wyoming Illinois Pennsylvania (etc) In addition, California, Maine, Ohio and Rhode Island have provisions within their regular corporation statutes that permit election to statutory close corporation status, but do not have special statutory close corporation statutes. If your home state does not allow for the creation of a statutory close corporation, you can simply form the entity in one of the above states, and then register it to do business in your home state. When choosing a state, the laws of the state in which the entity is formed will govern its legal affairs. The benefits derived from forming a statutory close corporation in one of these states, and then registering the corporation in the home state, will usually outweigh any additional costs involved. The special statutory close corporation statutes require that there be a limited number of shareholders (under 30 or, in some states, under 50), and that certain transfer restrictions appear on the stock certificates. The statutory close corporation must be formed under the special statute with particular language used in the articles of organization. A regular corporation also can be converted to a statutory close corporation in states that allow this type of corporation. |