Closely Held Stock

Key Takeaways

• Closely held stock is predominantly owned by a small group of individuals, unlike widely held stock, which involves thousands or millions of investors.
• These stocks are not typically traded on public exchanges, making hostile takeovers more difficult as shares are harder to acquire.
• One of the benefits of closely held stocks is the potential for S corporation status, which can lead to tax benefits for shareholders.
• The value of closely held stocks is not as exposed to market volatility, but they might lack the access to capital that publicly traded companies enjoy.
• Closely held stock can be gifted, maintaining control within families or contributing ownership to charitable organizations.

What Is Closely Held Stock?

Closely held stock refers to shares predominantly owned by a small number of investors, often within the same family or group. These stocks offer unique advantages, such as protection against hostile takeovers and potential tax benefits through S corporation status. Closely held stocks are not publicly traded, which can safeguard a company from market volatility and keep ownership concentrated.

How Closely Held Stock Operates

Closely held stock is typically not publicly traded on exchanges because the small number of owners rarely sell their shares. A common way that a closely held stock is created is when an entrepreneur starts and incorporates his or her own business, but retains ownership of the majority of the company's outstanding shares.

Advantages of Holding Closely Held Stock

When a company’s shares are closely held, it could allow the company to apply for S corporation status with the Internal Revenue Service for tax purposes. If the company qualifies, it would report income but not pay taxes. Instead, the shareholders in the S corporation would pay taxes on their proportional share of the profits. If the S corporation saw losses, then the owners of the closely held shares would get tax deductions. Further, there would be no additional tax paid on the company’s dividends.1

If the shares in a company are closely held, it can make the company more defensible against hostile takeover attempts or proxy wars. For example, a so-called activist investor might reach out to multitudes of holders of outstanding shares of a publicly traded company and offer to buy them out. This could allow the investor to build up a controlling interest and assert their own plans for the company, such as a sale. Such a strategy would be more challenging to enact with closely held stock due to the considerably smaller number of shareholders who may resist such efforts.

While it would still be possible to acquire the shares from owners, the pricing of such a deal would not be subject to the volatility seen with widely held stock. A drawback to closely-held stock is that the company would not have the same access to working capital as businesses whose shares are more freely available. However, the value of the shares in the company is also not exposed to the whims of the trading and investment trends of public stock exchanges and other platforms.

Closely held stock may be gifted to others, for example, as a form of inheritance, allowing control of the company to remain in the hands of the beneficiaries of the estate. The shares may also be gifted as a charity to organizations such as hospitals, universities, and foundations, allowing them to participate in the controlling ownership of the company.

Internal Revenue Service. "S Corporations."

Internal Revenue Service. "S Corporations."

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