Small business owners who incorporate may wonder if their company is considered a "closely held corporation," especially in light of the U.S. Supreme Court's recent Hobby Lobby decision.
As you probably know, closely held corporations like the craft-store chain Hobby Lobby are now eligible for an exemption from Obamacare's contraceptive mandate, so knowing the distinction can have real legal consequences.
So what exactly is a closely held corporation?
Definition of 'Closely Held'
Closely held corporations are ones that generally have the majority of the company's assets held in very few hands. Although Hobby Lobby is a giant corporation with thousands of employees and locations in several states, the corporation is owned by one family. According to The Wall Street Journal, the Supreme Court left it up to state corporate law to resolve the issue of whether a firm is "closely held."
The IRS has its own definition, stating that a closely held corporation must:
- Have more than 50 percent of the corporation owned by five or fewer people; and
- Not be a law firm, accounting firm, engineering firm, or other type of personal service firm.
However, other state corporate laws are more permissive. For example, California's Corporate Code allows a "close corporation" to have up to 35 members. So depending on your state, there may be some issues in determining whether your business meets the "closely held" definition.
How Many Businesses Are Closely Held?
A 2002 New York University study found that closely held corporations make up 52 percent of the country's workforce. As Supreme Court Justice Ruth Bader Ginsburg stated in her Hobby Lobby dissent, giant companies like Mars Inc. (maker of M&Ms) are also considered "closely held" corporations under the Court's ruling.
The WSJ reports that a 2000 study by the Copenhagen Business School found that "[r]oughly 90 percent of all companies in the U.S. are closely held."
Are S Corporations 'Closely Held'?
So what about S Corporations? Apparently they can be closely held too.
According to The Associated Press, Hobby Lobby is organized as an S Corporation -- a designation that allows a company to get some tax advantages, although it cannot have more than 100 shareholders. However, the AP reports that "all members of the same family are treated as a single shareholder."
So by using corporate organizations like S Corporations, family-run small businesses may be considered closely held while still operating multimillion-dollar enterprises.
- Need legal advice on how your small business should operate? Consult with an experienced business attorney about your options.
- Closely Held Corporation (Investopedia)
- What Companies Need to Know About Religious Obamacare Exemptions (FindLaw's In House)
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- C or S Corporation: What's the Legal Difference? (FindLaw's Free Enterprise)