Considerations for a Closely-Held Corporation in Ohio

Considerations for a Closely-Held Corporation in Ohio

Considerations for a Closely-Held Corporation in Ohio

The majority of successful family businesses in the United States are closely-held corporations: private (not publicly traded) companies with a limited number of shareholders holding the controlling share of corporate stock. Limited liability companies (or “LLCs”) also constitute a significant number of closely-held family businesses; however, this article does not address the corporation vs. LLC entity choice, which is a separate topic.

In general, corporations have various corporate formalities that must be followed in the course of managing the business. Business owners who incorporate in Ohio have the option of forming an “Ohio Close Corporation” under Chapter 1701.591 of the Ohio Revised Code, which allows increased flexibility and less stringent corporate governance. Other states may have similar laws proving a statutory close corporation structure.

The key benefit of an Ohio Close Corporation is maintaining a corporate existence while doing away with certain formalities. Fewer formalities mean there is a lesser chance the shareholders will fail to follow corporate governance rules.  The shareholders of an Ohio Close Corporation can elect to not have a board of directors and instead maintain all management control, and dispense with holding an annual shareholders’ meeting.  If the shareholders do away with the board of directors, all shareholders with voting rights are treated as the directors—they have fiduciary duties to the corporation and its shareholders, but also the immunities, defenses, and indemnifications generally available to the directors.  Because close corporations tend to have more relaxed formalities, an Ohio Close Corporation will likely incur less legal expenses and governance costs in the long run.

The key requirements of forming an Ohio Close Corporation are: (1) the shareholders must enter into a written close corporation agreement; (2) the agreement must be approved by every single shareholder at the time it is adopted; (3) the corporation must note the existence of a close corporation agreement on its stock certificates; and (4) the corporation cannot offer shares of company stock to the public. O.R.C. § 1701.591.

It is advisable that the written close corporation agreement contain provisions limiting the transferability of shares, including, rights of first offer or first refusal.  Effectively, with proper drafting, the shareholders can control the transferability and limit encumbrances of corporate stock without having a separate stock restriction agreement. If you are considering forming a close-held corporation, consult with a knowledgeable business attorney.

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