Closely Held Shares: Definition, Benefits, and Examples
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Summary:
Closely held shares, often overlooked in the bustling world of stock trading, offer a unique avenue for investors and businesses to maintain control and stability. Understanding the intricacies of closely held shares is crucial for investors seeking stability and corporations aiming to maintain control over their direction. In this article, we explore the definition of closely held shares, their characteristics, and their implications for investors and corporations alike.
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What are closely held shares?
Closely held shares, also known as closely held stock, denote stocks held by a limited number of investors in a closely held corporation. In a closely held corporation, a small group of shareholders, often including company insiders, possess the majority of available shares. These shareholders, termed as “majority” or “controlling” stockholders, typically have affiliations with the company, its management, or familial ties. The ownership structure of closely held shares contrasts sharply with publicly traded companies, where shares are available for purchase by the general public through stock exchanges.
Characteristics of closely held shares
Closely held shares share several defining characteristics:
- Limited number of investors
- Majority ownership by insiders or affiliated parties
- Minimal trading activity
- Stable share prices reflective of company performance
- Resistance to hostile takeovers
Understanding closely held shares
Closely held shares exist on a spectrum between publicly traded and privately held shares. Unlike publicly traded shares, which are readily available for trading on stock exchanges, closely held shares are traded infrequently, with limited opportunities for new investors to buy into the company. This limited trading activity stems from the close-knit nature of closely held corporations, where majority shareholders tend to retain their shares for the long term.
Ownership structure
In order for a corporation to qualify as closely held, a substantial portion of its shares must be held by individuals outside of the business, ensuring a degree of external ownership. While closely held shares confer the same ownership rights and privileges as actively traded shares, their ownership structure differs significantly. The control exerted by majority shareholders often leads to decisions that prioritize the long-term interests of the company over short-term market fluctuations.
Closely held shares vs. actively traded shares
While closely held shares and actively traded shares share similar characteristics, including ownership rights and voting privileges, their trading dynamics diverge significantly. Actively traded shares are subject to market sentiment and speculative trading activity, resulting in price volatility driven by investor behavior. In contrast, the value of closely held shares is primarily determined by the underlying performance of the company, leading to greater stability in share prices.
Special considerations
Closely held shares present unique considerations for investors and corporations:
- Valuation challenges due to limited trading activity
- Potential eligibility for S Corporation status for tax advantages
- Difficulty in raising additional capital through stock offerings
Case studies of closely held corporations
Examining real-world examples can provide valuable insights into the operations and dynamics of closely held corporations.
Example 1: Mars, Incorporated
Mars, Incorporated, the global confectionery, food, and pet care company, is a prominent example of a closely held corporation. Founded by Franklin Clarence Mars in 1911, the company remains family-owned to this day, with the Mars family holding significant control over its operations.
The family’s commitment to maintaining ownership and control of the company has allowed Mars, Incorporated to pursue long-term strategies and maintain its status as a market leader in various industries.
Example 2: C&S Wholesale Grocers
C&S Wholesale Grocers, one of the largest wholesale grocery suppliers in the United States, is another example of a closely held corporation. Founded in 1918 by Israel Cohen and Abraham Siegel, the company has remained privately owned and operated by the Cohen and Siegel families for over a century.
Despite operating in a highly competitive industry, C&S Wholesale Grocers has thrived as a closely held corporation, leveraging its family-centric approach to business and strategic decision-making.
Conclusion
Closely held shares play a vital role in the corporate landscape, offering unique benefits and challenges for investors and companies alike. By understanding the dynamics of closely held corporations and examining real-world examples, stakeholders can make informed decisions and navigate the complexities of private equity investments.
Frequently asked questions
What are the main differences between closely held shares and publicly traded shares?
Closely held shares are held by a limited number of investors in closely held corporations, while publicly traded shares are available for purchase by the general public through stock exchanges. Closely held shares typically have a stable share price reflective of company performance, whereas publicly traded shares may experience price volatility driven by market sentiment and speculative trading activity.
How do closely held shares impact company stability?
Closely held shares can contribute to company stability by fostering a long-term focus on company interests and resisting hostile takeovers. The control exerted by majority shareholders in closely held corporations often leads to decisions that prioritize the long-term growth and sustainability of the company.
What are the challenges associated with valuation of closely held shares?
Valuing closely held shares can be challenging due to limited trading activity and the absence of a public marketplace for selling shares. Without readily available market data, investors and analysts may struggle to accurately assess the true value of closely held shares.
How do closely held corporations raise additional capital?
Closely held corporations may face challenges in raising additional capital through traditional means such as stock offerings. Without the ability to issue shares on public markets, these companies may rely on internal financing, private investments, or alternative sources of funding to support their growth and expansion.
What are the tax implications of closely held shares?
Closely held shares may be eligible for S Corporation status with the Internal Revenue Service (IRS), which allows the corporation to pass income, losses, deductions, and credits through to their shareholders for federal tax purposes. This can provide tax advantages for shareholders, particularly in situations where the corporation experiences losses.
How can investors access closely held shares?
Accessing closely held shares can be challenging for investors due to limited trading opportunities. Unlike publicly traded shares, which are readily available for purchase on stock exchanges, closely held shares may require direct negotiation with existing shareholders or participation in private placement offerings facilitated by the corporation.
Key takeaways
- Closely held shares are held by a limited number of investors in closely held corporations.
- They offer stability but limited trading opportunities.
- Valuation and capital raising present challenges for closely held corporations.
- Understanding the ownership structure is crucial for investors and corporations alike.
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