Is there any advantage to forming as a statutory close corporation?

Corporation statutes are generally one-size-fits-all, that is, the same statutory directives apply to a corporation with one shareholder as to the Walt Disney Company. However, many states do include some provisions directed specifically at small, or “close,” corporations (which, in California, is defined to mean a corporation with not more than 35 shareholders that chooses “close corporation” status). The purpose of these special provisions is to permit small corporations to enjoy the benefits of incorporating, including limited liability for shareholders, while allowing the business to be run more like a partnership and with less of the formalities required of a corporation. See Cal. Corp. Code § 300. However, a close corporation still has to make all required filings with the secretary of state. In addition, it is more costly to set up a close corporation, as the shareholders enter into a shareholders’ agreement (which should be drawn up by a lawyer) that governs the affairs of the close corporation, including its management, division of its profits, and distribution of its assets on liquidation. And, as the business grows, it may be difficult to add shareholders, even apart from the numerical ceiling, as any new shareholder must agree to become a party to the shareholders’ agreement or the agreement is terminated. All in all, we think the limitations of incorporating as a statutory close corporation outweigh the benefits, so that you are better off just forming as a regular corporation and paying attention to maintaining corporate formalities.