What Is A Close Corporation In Maryland?
Maryland Close Corporations Close corporations are generally smaller businesses who desire the limited liability and tax benefits of a corporation but whose stockholders wish to maintain streamlined managerial control of the business. With corporation status comes many formalities.
- One of the advantages of a close corporation is the elimination of the board of directors.
- Close corporations are creatures of statute and states generally differ as to the rules that govern them.
- In Maryland, a business can elect to be a close corporation by including a clear and unambiguous statement in its Articles of Incorporation, filed with the State Department of Assessment and Taxation, that it is electing such status.
An election may also be made by way of an amendment to the articles, when approved by every stockholder. MD Corp. & Assoc., § 4-201. Upon election to be a close corporation, various rights and responsibilities are conferred upon the corporation’s stockholders.
Board of Directors, A close corporation may elect to have no Board of Directors. Until such an election becomes effective, there must be at least one director; however, when the election does become effective, the directorship position is terminated. MD Corp. & Assoc., § 4-301. By electing to forego having a board of directors, the stockholders become responsible for any actions ordinarily required by law to be taken by the board of directors.
The stockholders may also exercise all powers normally afforded to the directors and manage the affairs of the corporation. MD Corp. & Assoc., § 4-303. Unanimous Stockholders’ Agreement, In a close corporation, a unanimous stockholders’ agreement allows for the stockholders to regulate and manage any aspect of the corporation’s affairs.
These affairs include the management of business, restrictions on stock transfer, the rights of stockholders to dissolve the corporation, the division of voting power, terms and conditions for officer and employee employment, and the election of officers and payment of dividends. MD Corp. & Assoc., § 4-401.
A unanimous stockholders agreement of a close corporation may only be amended by unanimous consent of the stockholders who were party to the agreement. If a stockholder acquires stock after the stockholders agreement is already in effect, that stockholder is considered to have consented to the agreement if, 1) the acquisition of stock was by gift or through inheritance from a stockholder who was party to the agreement, or 2) if the stockholder had actual knowledge of the agreement at the time he acquired the stock.
MD Corp. & Assoc., § 4-401. Annual Stockholder Meeting, The bylaws of a close corporation must provide for an annual meeting of stockholders, but this annual meeting does not need to actually take place unless it is requested by a stockholder. The request for an annual meeting must be made in writing and delivered to the President or Secretary of the corporation at least thirty days before the date or period when the meeting should be held, as stated in the bylaws.
MD Corp. & Assoc., § 4-402. Right of Inspection and Request for Statement of Affairs, A stockholder or agent of a stockholder may inspect and copy any records of the corporation relevant to its business during business hours. These records include bylaws, minutes of the stockholders’ meetings, annual statements of affairs, stock ledgers and books of account.
MD Corp. & Assoc., § 4-403. A stockholder may also, by written request, receive a statement of affairs once per calendar year. MD Corp. & Assoc., § 4-404 Unanimous Voting Requirements, Requiring unanimous approval of all stockholders is one way that minority shareholders are protected in a close corporation.
Unanimous votes from all stockholders are required for the following issues: 1) election and termination of close corporation status; 2) issuance of stock, 3) transfers of stock, 4) stockholder agreements; 5) denial & restriction of voting rights and 6) fundamental corporate changes such as consolidation, merger or transfer of assets.
Restrictions, By statute, a close corporation may not have outstanding any securities which are convertible into its stock, voting securities other than stock, or options, warrants or other rights to purchase any of its stock, unless they are nontransferable. MD Corp. & Assoc., § 4-502. It is common for close corporations to have restrictions on stock sale or transfer.
Small business stockholders generally want to ensure that the company stock remains within the control of the current stockholders, or sometimes even in the family of stockholders. Sale or transfer restrictions can be imposed by way of the company bylaws, articles of incorporation or through a stockholders’ agreement.
- A common restriction is an agreement wherein each stockholder will agree to refrain from selling his/her stock without first allowing the corporation the offer to repurchase at an agreed upon price.
- Transfers of close corporation stock are invalid unless all stockholders unanimously consent to the transfer in writing, within ninety days of the transfer, or if the transfer is made pursuant to the stockholders agreement.
MD Corp. & Assoc., § 4-503. Dissention, While unanimous voting requirements can afford some protections and advantages to close corporation stockholders, it also means that any one stockholder can cause a proposed change to be rejected simply by withholding consent.
- Maryland’s statute provides a remedy for situations where the stockholders find themselves in voting deadlocks and therefore can no longer conduct the affairs of the business to the stockholders’ general benefit.
- Any stockholder may petition the court for dissolution of the corporation if the stockholder has not received consent to transfer his stock within thirty days of the request, or when a party to the stockholders’ agreement defaults on an obligation.
MD Corp. & Assoc., § 4-602. The threat of involuntary dissolution can effectively incentivize stockholders into reaching an agreement themselves, but this is not always the case. Recognizing that involuntary dissolution and court interference in business is not always the best solution, Maryland law provides stockholders with a method to avoid dissolution.
- 1 What is the difference between a company and a close corporation?
- 2 Can one person own a close corporation?
- 3 What is a close corporation in business give one example?
- 4 Is a close corporation taxed separately from its members?
- 5 Can a close corporation take legal action against its members?
- 5.1 What is another name for the close corporation?
- 5.2 What happens when a member of a close corporation dies?
- 5.3 What are the 4 types of corporations?
- 5.4 How are profits distributed in a close corporation?
- 5.5 Is close corporation the same as C Corp?
- 5.6 What does HMRC mean by a close company?
What is considered a close corporation?
A close corporation is a corporation which is held by a limited number of shareholders and is not publicly traded.
What is the difference between a company and a close corporation?
Top tip: As from 1 May 2011 (implementation date of the Companies Act 71 of 2008), no new close corporation can be registered or any conversion from a company to a close corporation allowed. A CC is similar to a private company. It is a legal entity with its own legal personality and perpetual succession and must register as a taxpayer in its own right.
- A CC has no share capital and therefore no shareholders.
- The owners of a CC are the members of the CC.
- Members have a membership interest in the CC.
- Members’ interest is expressed as a percentage.
- Membership, generally speaking, is restricted to natural persons or (from 11 January 2006) a trustee of an inter vivos trust or testamentary trust.
A CC may not have an interest in another CC. The minimum number of members is one and the maximum number of members is 10. For income tax purposes, a CC is dealt with as if it is a company.
|Some advantages||Some disadvantages|
|Relatively easy to establish and operate.||Number of members restricted to a maximum of 10.|
|Life of the business is perpetual, that is, it continues uninterrupted as members change.||More legal requirements than a sole proprietorship or partnership|
|Members have limited liability, that is, they are generally not liable for the debt of the CC. However, certain tax liabilities do exist. One such liability is where an employer or vendor is a CC, every member and person who performs functions similar to a director of a company and/or who controls or is regularly involved in the management of the CC’s overall financial affairs, will be personally liable for employees’ tax, value-added tax, additional tax, penalty or interest for which the CC is liable, that is, where these taxes have not been paid to SARS within the prescribed period.|||
|Transfer of ownership is easy.|||
|Fewer legal requirements than a private company|||
Can one person own a close corporation?
MEMBERS – A Close Corporation has members. It can have only one member or it can have up to ten, and no more than ten, members. The members of a Close Corporation can be either a natural person, or a Trust.
What is a close corporation in business give one example?
What is a close corporation? – A close corporation is a legal entity much like a company. A CC is run and administered by its members, who must be natural persons (i.e. not other legal entities). A close corporation’s members are like a company’s shareholders.
- In the past, the members of a close corporation usually chose the entity because it was cheaper and easier to administer than a private company ((Pty) Ltd).
- The business could be mature or a start-up, but it could only have a maximum of 10 members.
- In the past, companies used to have many regulations and requirements that made the entity difficult for small businesses.
These extra requirements made the close corporation a much more attractive business form.
How is a close corporation taxed?
In terms of the apportionment system, the taxable income of the corporation is apportioned directly to its members, and they are taxed on that taxable income as if it has accrued to them.
Is a close corporation taxed separately from its members?
CLOSE CORPORATIONS Keeping Close Corporations Close In the last issue, we gave consideration to the sole proprietorship and the partnership as forms as business enterprise available to RMI members. In this issue, attention will be given to close corporations.
- Since the advent of Close Corporations in 1985, this form of business entity has proven popular due to the fact that it is particularly suitable for conducting business as a small to medium enterprise.
- The formalities for the formation and maintenance of a CC are not very cumbersome and costs associated therewith relatively low.
The characteristics of a CC includes that all the members must be natural persons or trustees of natural persons and recently, also certain Trusts, subject to specific requirements. Each member is entitled to be involved in the business of the CC and has equal rights to manage and represent the Corporation.
Under certain circumstances, the CC may buy members’ interests or may render financial assistance to incumbents for the acquisition of interests. The Corporation is taxed at the current rate of taxation applicable to companies, but the distribution of profits to members is tax free in the hands of the recipients.
However, such distributions do attract secondary tax on companies. Some of the advantages are the following:
It has a legal personality separate from its members and members are generally not liable for the debts of the Corporation and also enjoy the benefit of continuity; A single person may establish a Close Corporation and the object of the Close Corporation need not be that of making a profit; Simplicity of management as there is no separate Board of Directors or prescribed annual general meetings and informal decision taking is allowed; No statutory audit requirements exists, as financial statements must reflect the results of the business reasonably; Transfer and acquisition of members’ interests are not liable to stamp duty; The Act regulating CC’s is short and relatively uncomplicated (83 Sections) as opposed to the Companies Act (443 Sections).
Some of the few disadvantages are:
Close Corporations are limited to ten members; Members run the risk of being personally liable for the debts of the Corporation if certain provisions of the Act are not complied with or if they placed the CC and its creditors unduly at risk; Every member is an agent of the CC and can act on its behalf and bind it to third parties and creditors.
In recent times, there is a movement towards scrapping the Close Corporation as a business form in favour of companies. It is important to note that amendments to the Companies and Close Corporations Acts were promulgated by the Corporate Laws Amendment Act, number 24 of 2006 and will come into effect on a date to be proclaimed.
Can a close corporation take legal action against its members?
SECTION 43 – If a member acts negligently and causes damage to the Close Corporation, the member can be held liable by the Close Corporation for any damages that the Close Corporation has suffered because of such negligence. The member will act negligently if he/she does not act with the degree of care and skill that may be reasonably expected from a person with his/her knowledge and experience.
What is another name for the close corporation?
Understanding Closed Corporation – By structuring as a closed corporation when incorporating, a partnership can benefit from liability protection without dramatically changing the way that the business operates. It can also offer companies greater flexibility in operations, as they are free from most reporting requirements and shareholder pressure.
Close corporation Privately held company Private company Family corporation Incorporated partnership
They also may be referred to as ” closely held,” “unlisted,” or “unquoted.” Closed corporations are not publicly traded on any stock exchanges and are thus closed to investment from the general public. Shares are often held by the owners or managers of the business and sometimes even their families.
What happens when a member of a close corporation dies?
Membership of a close corporation and death of a member Many individuals in South Africa are still members of Close Corporations. A Close Corporation (“CC”) is what is known as a juristic person – in law it is regarded as an entity separate from the individuals who are members of it.
GENERAL RULE ON THE DEATH OF A MEMBER OF A CC
The member’s interest in the CC held by the deceased will form an asset in the deceased’s estate. As such membership has value, the executor of the estate will need to either sell the member’s interest, transfer it to the heirs, or have the CC liquidated or deregistered (if the business is not set to continue).
The executor will be guided in this decision by the Association Agreement of the CC as well as the last will and testament of the deceased. The Association Agreement is the agreement which regulates the relationship of the members of the CC. The Association Agreement can, for instance, provide for pre-emptive rights for the other members in the event of the death of a member, or it can, for instance, give the power to the members to bequeath their interest to a specific class of family members.
However, in the absence of such an agreement, the Close Corporation Act 69 of 1984 (“the Act”) sets out a number of rules.
THE CLOSE CORPORATIONS ACT
- In terms of the Act, a member of a CC may bequeath his/her member’s interest in the CC to an heir in his/her estate. However, in order for the interest to pass successfully to the named heir, the heir must qualify for membership in terms of Section 29 of the Act and the other members of the CC will need to consent to the heir becoming a member (Section 35(a) of the Act). Section 29 of the Act sets out the general requirements for membership, which will also apply to a named heir of member’s interest. In order to qualify to be a member of a CC, the heir must be one of the following:
- A natural person; or
- A natural or juristic person, nomine officii, who is a trustee of a testamentary trust entitled to a member’s interest, provided that no juristic person is a beneficiary of such trust, and if the trustee is a juristic person, such juristic person is not controlled, directly or indirectly, by a beneficiary of the trust; or
- A natural or juristic person, nomine officii, who, in the case of a member who is insolvent, deceased, mentally disordered, or otherwise incapable or incompetent to manage his affairs, is a trustee of his insolvent estate or an administrator, executor, or curator in respect of such member or is otherwise a person who is duly appointed or is an authorized legal representative.
- For a named heir therefore to replace the deceased as a member of the CC, he/she must, firstly, adhere to the requirements as set out in Section 29 of the Act and, secondly, the remaining members must consent to the appointment of the named heir as a member.
- Where an executor of the estate is not obliged or does not intend to transfer the interest of the deceased member to any other person in accordance with the provisions of the Act within 28 days of the executor assuming office, he/she must within that period, or any extended period allowed by the Registrar (now Companies and Intellectual Property Commission (“CIPC”)), on application by the executor, request the existing member(s) of the CC to lodge with the Registrar (CIPC) in accordance with Section 15 (1) of the Act, an amended Founding Statement designating the executor, nomine officii, as representative of the deceased member of the CC in question (Section 29(3)(c)).
- Further, where the remaining members of the CC do not consent to the transfer of the member’s interest within 28 days after being so requested by the executor, the executor will have no option but to sell the deceased member’s interest to the CC or any other members proportionate to their member’s interests in the CC, or as they may otherwise agree on (Section 35(b)).
DOWNFALLS OF THE ABSENCE OF AN ASSOCIATION AGREEMENT
It is clear from the above that some sections of the Act have in certain circumstances left the members vulnerable. The Act has, for instance, left a few options available to members who wish to bequeath their member’s interest in a will and testament.
- Where the CC has no Association Agreement, the remaining members will need to consent to the transfer of the deceased member’s interest to his/her heir and they are free to withhold this consent, in which event the executor of the estate will be obliged to sell the member’s interest.
- Thus, the succession plan of the deceased, as well as his/her testamentary freedom, may be inhibited.
It is therefore important to ensure that a proper Association Agreement is in place between members of the CC that explicitly states what the members’ rights are upon death.
A DECEASED MEMBER’S INTEREST AND BUY AND SELL AGREEMENTS
- A CC can purchase an interest in itself. Therefore, on the death of a member of a CC, the CC can purchase the membership interest of the deceased member. In effect, the membership of the remaining members increases to 100%, proportionate to what they held beforehand. The CC does not continue to hold an interest in itself – what actually happens is the CC pays a pro rata share of its capital to the estate of the deceased member.
- In order to achieve the aforesaid, there must be an agreement (usually as part of the Association Agreement) in which it is determined that the CC will purchase a deceased member’s interest and that, for example, life insurance will be used to fund the purchase of the deceased member’s interest. As a result, the surviving members’ interest will increase to 100% and each remaining member will end up with a larger percentage membership in a smaller capital base. The benefits of this may include the possibility of using a key-man life policy, which may be exempt from estate duty while ensuring that the deceased member obtains value in his/her deceased estate for his/her member’s interest.
- The same principle can be applied between the members themselves – they can enter into a Buy and Sell Agreement in terms whereof the existing members agree to purchase the deceased member’s interest. Life insurance policies are often used to fund such purchase and, if the purchase is structured correctly, it can also be free from estate duty.
- An executor will be bound by these agreements and will sell the deceased member’s interest to the purchaser thereof in terms of the agreements and the proceeds will devolve as part of the estate assets upon the heirs.
When a member wishes to bequeath his/her member’s interest in a CC, he/she must keep in mind the fact that, without an Association Agreement, his/her wishes may not come to fruition, as the consent of the remaining members will have to be obtained. In such an instance, the executor of the deceased member’s estate will be forced to sell the member’s interest back to the CC, or to the members thereof, which may not be what the parties intended.
- Anica Theunissen Ashleigh Vercuiel
- BCom; LLB; LLM (Estate Planning) LLB
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: Membership of a close corporation and death of a member
What are the 4 types of corporations?
Know the types of corporations – There are four general types of corporations in the United States: a sole proprietorship, a Limited Liability Company (LLC), an S-Corporation (S-Corp), and a C-Corporation (C-Corp).
How are profits distributed in a close corporation?
A portion of the profit for the period of the close corporation (after tax) is distributed between the members. The amount to be distributed is agreed on by the members at a special meeting, and is shared according to the interest that each member has in the close corporation.
Is close corporation the same as C Corp?
Advantages and Disadvantages of Close Corporations – As with any type of business structure, there are upsides and downsides that owners should be aware of. Some of the advantages of close corporations include the following:
Liability limitations – While there are fewer corporate formalities required with close corporations, the shareholders do not face any personal liability for the debts of the corporation. Operational flexibility – As there are fewer shareholders, and depending on how the shareholder agreements are written, there are far fewer reporting requirements. SEC requirements – Unlike a publicly traded company, a close corporation has no obligation to submit information about issues that impact the company and require a vote by a certain date. In many cases, changes may be considered without the requirement of a meeting. Lower costs of operation – There are fewer reporting requirements, making the overall cost of accounting, legal counsel, and administrative fees much more inexpensive and saving the company thousands of dollars annually. Buyout of stock – The shareholder agreement will typically have clear directions for buying back stock for shareholders who are deceased, when a shareholder exits the corporation for any reason, or to handle stock transfers in the event of divorce. This is typically to avoid having outsiders become part of the company. Intellectual property rights – In most cases, a close corporation has less risk when it comes to protecting its intellectual property because only those inside the corporation are aware of what processes, methods, or documents are used inside the company.
There are also downsides to this type of business structure, as follows:
Limited options for divesting shares – The shareholder agreement will contain specific restrictions on divesting shares. In most cases, to sell the corporate shares, the interested shareholder can only sell shares to current shareholders. This may put limitations on how much the shareholder can earn on the sale and limits the number of people who may purchase the shares, Limited options for capitalization – Unlike other business structures, the capital of a close corporation comes only from the owners of the corporation. This can be a serious limitation should the company wish to expand. Since there is no publicly traded stock, the owners cannot solicit funds from people other than the owners. Close corporation taxation – Close corporations are taxed as a C corporation unless the owners and shareholders decide to seek S corporation status from the IRS, This means the income of the corporation may be subject to double taxation.
Is your corporation a close corporation?
Key Takeaways –
Closed corporations are companies with a small number of shareholders that are privately held by managers, owners, and even families.These companies are not publicly traded and the general public cannot readily invest in them.Closed corporations have more flexibility compared to publicly traded companies as they are free from most reporting requirements and shareholder pressure.With fewer shareholders involved and shares not publicly traded, liquidity can be an issue for closed corporations.
What does HMRC mean by a close company?
The definition of a close company is complex and the statutory provisions should be consulted for a full understanding (see Chapter 2 of Part 10, Corporation Tax Act 2010 ). The definition is summarised in broad terms below. A company is a close company if it is a UK resident company and five or fewer participators, or any number of participators who are directors, either:
Have control of the company (and control has a special, broader meaning for this purpose than in some other tax statutes); or Together possess, or are entitled to acquire, rights to receive the greater part of the assets of the company available for distribution among participators on a notional winding up (disregarding the rights any person – including one of the relevant participators – holds as a loan creditor of the company or any other company).
Participators include shareholders and a wide-ranging category of persons with other interests in the company, such as loan creditors, those with rights to acquire shares and their respective associates. (The meaning of “director” is also extended for the purposes of the close company definition.) However, various descriptions of company are excluded from being a close company, including:
A registered industrial and provident society or building society. A company controlled by the Crown.
controlled by one or more companies which are neither: (a) close companies; nor (b) non-UK resident companies that would be close if UK resident; and which can only fall within the definition of a close company if the relevant five or fewer participators are taken to include a company of that description.
A company of which at least 35% of the voting share capital is beneficially held by members of the public, if those shares have, within the preceding 12 months, been listed on and the subject of dealings on a recognised stock exchange, However, this exception does not apply if, broadly, the principal members of the company hold more than 85% of the voting power in the company (the principal members being those who each hold more than 5% of the voting power in the company or, if there are more than five such members, the five with the largest holdings).
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Is a close corp an S Corp?
Possible Loss of S-Corp Status – Many companies take advantage of applying for S-corp status with the IRS. A close corporation can apply for S-corp status, but only if it distributes profits proportionately. If shareholders choose to distribute profits disproportionately, then the close corporation cannot opt for S-corp status.