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What is a closely held business?

The news media frequently follow the fortunes of publicly traded companies. Entire cable news networks are devoted to covering the stock market, and even local newscasts usually make sure to announce how the Dow Jones Industrial Average and the NASDAQ did that day.

Though the businesses that are traded on the stock exchange are generally important blocks in the U.S. economy, the vast majority of businesses are owned by a small number of people. “Closely held businesses” are those that have more than 50 percent of its outstanding stock owned, either directly or indirectly, by five or fewer individuals.

This form of ownership is very common. About 90 percent of U.S. companies are closely held businesses, according to a study from 2000. Many, if not most, of these companies are controlled by members of the same family that founded it.

As with most business decisions, having your company be closely held has advantages and drawbacks. Obviously, each individual owner can have a great deal influence over the business. On the other hand, without publicly trading half the stock in the company, it can be difficult to raise money to expand the company or pay off debt.

It may also have legal consequences, as we saw in the recent Hobby Lobby decision issued by the U.S. Supreme Court. Rulings like that shows how, sometimes, closely held businesses have different legal rights and obligations that publicly traded companies.

Business owners who have more questions about how to structure their company’s ownership should speak to a business law attorney.

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