What is a “Close Corporation” Under North Carolina Law?
A corporation is a type of business entity that has a separate legal existence from its owners. This insulates the owners, in most instances, from personal liability for the corporation’s liabilities. North Carolina corporations are regulated under North Carolina General Statutes, Chapter 55.
But when talking about corporations, people often talk about a “close” corporation. This post explains what a close corporation is and how it differs from a public corporation or other types of corporations.
Close corporations are typically companies established based on personal relationships. These relationships give rise to certain reasonable expectations on the part of those acquiring an interest in the close corporation.
Those expectations include, for example, the parties’ expectation that they will participate in the management of the business, or that they will be employed by the company.
This is different from a large corporation or a public corporation. After all, with a company like Coca-Cola or McDonald’s just because you purchase a few shares you would not expect to be given managerial responsibility. In close corporations, though, there are only a few owners and the ownership and management overlap.
In Norman v. Nash Johnson & Sons Farms, Inc., 140 N.C. App. 390, 404 (2000), the North Carolina Court of Appeals defines close corporations in the following way:
[A close corporation is a] corporate entity typically organized by an individual, or a group of individuals, seeking the recognized advantages of incorporation, limited liability, perpetual existence and easy transferability of interests – but regarding themselves basically as partners and seeking veto powers as among themselves much more akin to the partnership relation than to the statutory scheme of representative corporate government.
In short, though the company looks like a corporation, it functions like a partnership. You can think of it like an “incorporated partnership.” Partners have much higher duties to each other than do investors in a public corporation. One legal treatise explains that a close corporation “is one which requires close cooperation and a high degree of good faith and mutual respect.”
Putting legal rules aside, as a practical matter, when it comes to closely held corporations, our experience is that if one of the owners is doing something questionable, it is very likely to qualify as some type of breach of duty to the other owners.
There are many remedies that are available to the other owners, including money damages, stock buyouts, injunctive relief, or even dissolution of the closely held corporation.
If you have a question about the law of corporations, closely held or otherwise, contact us at 980-999-3557. Fairview Law is a Charlotte, North Carolina based law firm that concentrates its practice in the areas of business and corporate law.