If you want the liability protection of a corporation but prefer the flexibility of a partnership, a close corporation might be the right choice. Florida law allows small businesses to elect close corporation status, which relaxes many traditional corporate formality requirements while maintaining liability protection.
This guide explains what a close corporation is, who should consider one, and how it compares to other business structures.
What Is a Close Corporation?
A close corporation is a corporation that elects to operate under simplified rules designed for small, closely-held businesses. Instead of requiring a formal board of directors, officers, and annual meetings, close corporations can operate more like partnerships.
Key Characteristics
- Limited shareholders: Typically 35 or fewer shareholders
- Restricted stock transfer: Shares cannot be freely sold to outsiders
- Relaxed formalities: May eliminate the board of directors
- Direct management: Shareholders can manage directly
- Shareholder agreements: Can govern the corporation like a partnership
How Florida Defines Close Corporations
Under Florida Statutes § 607.0901-607.0905, a close corporation:
- Makes an election in its Articles of Incorporation
- Limits the number of shareholders (typically to 35)
- Restricts transfer of shares
- May eliminate the board of directors by shareholder agreement
Close Corporation vs. Regular Corporation
| Feature | Close Corporation | Regular Corporation |
|---|---|---|
| Board of directors | Optional (can eliminate) | Required |
| Annual meetings | Can be informal | Formal requirements |
| Share transfers | Restricted | Generally unrestricted |
| Shareholder limit | Yes (usually 35) | No limit |
| Stock offered to public | Not allowed | Allowed |
| Management | Shareholders can manage directly | Board/officer structure |
| Formalities | Reduced | Full corporate formalities |
The main advantage of a close corporation is operational simplicity while retaining corporate liability protection.
Who Should Consider a Close Corporation?
Good Candidates
Family businesses: When ownership stays within the family, close corporation rules prevent outsiders from acquiring shares.
Small partner groups: A few trusted business partners who want corporate protection but partnership-style management.
Solo entrepreneurs: Single-owner businesses that want corporate structure without formal board meetings.
Businesses that won’t seek outside investors: If you never plan to sell shares publicly or bring in venture capital.
Poor Candidates
Businesses seeking investors: Venture capital and angel investors typically want standard corporate structures.
Fast-growing startups: The shareholder limits and transfer restrictions can become problematic.
Businesses planning to go public: Close corporation status is incompatible with public stock offerings.
Large ownership groups: If you anticipate more than 35 shareholders.
Benefits of a Close Corporation
1. Simplified Management
You can eliminate the board of directors entirely. Shareholders manage the corporation directly, making decisions without formal board meetings and resolutions.
2. Reduced Formality Requirements
While still recommended, you have more flexibility with:
- Meeting requirements
- Record-keeping
- Corporate resolutions
- Officer positions
3. Protection Against Unwanted Shareholders
Stock transfer restrictions ensure shares can’t be sold to outsiders without consent. This keeps ownership within your trusted group.
4. Partnership-Style Operations
Shareholders can agree to operate the business like a partnership — sharing management duties, splitting profits in any agreed ratio, and making decisions jointly.
5. Liability Protection
Despite the relaxed rules, you still receive the liability protection of a corporation. Personal assets are generally protected from business debts and lawsuits.
Disadvantages of a Close Corporation
1. Limited Growth Potential
The shareholder restrictions make it difficult to:
- Bring in investors
- Offer stock options to employees
- Scale ownership
2. Illiquid Shares
Transfer restrictions mean shareholders may have difficulty selling their shares. This can trap investment and create disputes.
3. Potential for Shareholder Deadlock
With few shareholders managing directly, disagreements can paralyze the business. There’s no board to break ties.
4. Less Familiar to Banks and Partners
Some banks, vendors, and business partners are less familiar with close corporations and may require additional explanation.
5. Risk of Losing Status
If you exceed shareholder limits or violate close corporation requirements, you may lose the special status.
How to Form a Florida Close Corporation
Step 1: Form a Standard Corporation First
File Articles of Incorporation through Sunbiz.org with the standard $70 filing fee.
Step 2: Elect Close Corporation Status
Include in your Articles of Incorporation (or amend existing Articles to add):
Required language:
“This corporation elects to be a close corporation pursuant to Florida Statutes § 607.0901 et seq.”
Step 3: Add Required Provisions
Your Articles should also include:
Share transfer restrictions:
“All shares of stock of this corporation shall be subject to the following transfer restrictions: [describe restrictions]”
Shareholder limit:
“This corporation shall have no more than [35] shareholders.”
Stock legend requirement:
“All stock certificates shall bear a legend noting the close corporation status and transfer restrictions.”
Step 4: Create a Shareholders’ Agreement
This is where the real flexibility comes in. Your shareholders’ agreement can:
- Eliminate the board of directors
- Specify how shareholders will manage the business
- Define voting requirements for major decisions
- Establish buyout procedures
- Set dispute resolution mechanisms
- Describe what happens if a shareholder dies, divorces, or becomes disabled
Step 5: Issue Stock with Legends
Every stock certificate must include a notice (legend) stating:
- The corporation is a close corporation
- Shares are subject to transfer restrictions
- Reference to the shareholders’ agreement
Close Corporation Shareholders’ Agreement
The shareholders’ agreement is the foundation of a close corporation. It typically covers:
Management Structure
- Who makes daily decisions?
- What requires unanimous consent?
- How are disputes resolved?
- Can shareholders delegate to a manager?
Financial Matters
- How are profits distributed?
- What salaries do working shareholders receive?
- How are capital contributions handled?
- What happens if the business needs more money?
Transfer Restrictions
- Right of first refusal: Corporation or other shareholders get first chance to buy shares
- Consent requirements: May require unanimous consent for transfers
- Prohibited transfers: List of people who cannot receive shares
- Valuation method: How shares are priced for buyouts
Exit Provisions
- Buyout triggers: Death, disability, retirement, divorce
- Funding mechanisms: Life insurance, installment payments
- Non-compete agreements: What happens after a shareholder exits
- Dissolution procedures: When and how the corporation can be dissolved
Dispute Resolution
- Mediation requirements
- Arbitration provisions
- Deadlock-breaking mechanisms
- Buyout rights for irreconcilable disputes
Close Corporation vs. LLC
Many businesses that would benefit from close corporation status would also be well-served by an LLC. Here’s how they compare:
| Feature | Close Corporation | LLC |
|---|---|---|
| Liability protection | Yes | Yes |
| Management flexibility | High (with election) | High (by default) |
| Formality requirements | Reduced (with election) | Minimal by default |
| Default taxation | C Corp (double taxation) | Pass-through |
| S Corp election | Available | Available |
| Formation cost (FL) | $70 | $125 |
| Annual report (FL) | $150 | $138.75 |
| Ownership terms | Shareholders with stock | Members with interests |
| Familiarity | Less common | Very common |
Bottom line: For most small Florida businesses, an LLC provides similar benefits with less complexity. Close corporations make sense when you specifically want the “corporation” designation or have reasons to prefer corporate structure.
Maintaining Close Corporation Status
To keep your close corporation status:
Do
- Keep shareholders under the limit
- Enforce transfer restrictions
- Include legends on all stock certificates
- Follow your shareholders’ agreement
- File annual reports on time
Don’t
- Exceed the shareholder limit
- Allow unrestricted stock transfers
- Offer stock to the public
- Ignore the shareholders’ agreement provisions
What Happens If You Lose Status?
If you violate close corporation requirements:
- You become a regular corporation
- Full corporate formalities apply
- You may need to quickly implement board structure and officer positions
- Existing operations may be questioned
Tax Considerations
Default: C Corporation
Close corporations are taxed as C Corporations by default:
- Corporate income tax on profits
- Dividends taxed again to shareholders
S Corporation Election
Most close corporations benefit from S Corp election:
- Pass-through taxation
- Avoid double taxation
- Must meet S Corp requirements
File IRS Form 2553 to elect S Corp status.
Reasonable Compensation
If you’re an S Corp and also a shareholder-employee, you must pay yourself reasonable compensation before taking distributions.
Frequently Asked Questions
Is a close corporation the same as an S Corporation?
No. A close corporation is a type of corporate structure under state law. An S Corporation is a tax election with the IRS. A close corporation can elect S Corp tax status.
How many shareholders can a close corporation have?
Florida doesn’t specify a maximum in statute, but close corporation provisions are designed for small groups — typically 35 or fewer shareholders is the standard.
Can a close corporation have one shareholder?
Yes. A single person can form and own a close corporation.
What if a shareholder wants to sell their shares?
Transfer restrictions in your Articles and shareholders’ agreement govern this. Typically, other shareholders have a right of first refusal before shares can go to outsiders.
Is a close corporation better than an LLC?
It depends on your situation. LLCs are simpler and more common. Close corporations make sense if you specifically want corporate structure with relaxed formalities.
Can a close corporation become a regular corporation?
Yes. You can amend your Articles of Incorporation to remove the close corporation election and transfer restrictions.
The Bottom Line
A Florida close corporation offers:
- Corporate liability protection
- Partnership-like operational flexibility
- Protection against unwanted shareholders
- Reduced formality requirements
However, the complexity of setting up proper agreements and the limitations on growth make LLCs a better choice for most small businesses.
Consider a close corporation if you specifically need or want corporate structure but want to operate informally among a small, trusted group of shareholders.
Need help deciding the right structure? IncCraft can help you choose between LLCs, corporations, and close corporations based on your specific business needs.