What Are Statutory Close Corporations and How Are They Different from Regular Corporations?
A statutory close corporation is a special election that corporations with fewer than 50 shareholders may select. The designation allows for more flexibility than typically allowed with a “regular” corporation. For example, the entity may elect not to have a board of directors and, instead be managed by its shareholders. A statutory close corporation is not required to hold an annual meeting unless one of the shareholders sends a written request at least 30 days in advance for such a meeting. Bylaws are not required if the necessary provisions are set forth in the Articles of Incorporation or in an agreement among the shareholders. In addition, the entity is allowed to have one or more officers, with one officer serving in more than one capacity.
By contrast, the directors and shareholders of a regular corporation are technically required to hold consistent meetings. Formal requirements mandating notice, quorums and meetings must be followed or the shareholders risk a court decision allowing a third party to pierce the corporate veil (i.e., exposing the shareholders to unlimited, personal liability for the corporation’s obligations). With the reduction or, in some cases, the elimination, of such formalities, the likelihood of piercing the corporate veil is reduced with a statutory close corporation.
With benefits come some drawbacks and a close corporation is no exception to this general rule. The shares are generally subject to severe transfer restrictions, with transfers limited to the corporation, existing shareholders and family members unless unanimous consent of the remaining shareholders is obtained.
To become a statutory close corporation, Wisconsin Statutes require that the specific language be included in the entity’s Articles of Incorporation and on each stock certificate. Also, note that not all states allow statutory close corporations.
Statutory close corporation elections were more popular prior to Wisconsin’s adoption of legislation allowing the formation and operation of limited liability companies in 1993. Now, business owners looking for a means to have corporate flexibility will often opt for a limited liability company. Nevertheless, statutory close corporations remain one of the entity choices in Wisconsin and may be utilized when doing so is in the best interest of the shareholders.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.