WHAT IS THE DIFFERENCE BETWEEN A CLOSELY HELD CORPORATION AND ONE THAT IS PUBLICLY TRADED?

Most businesses in Minnesota are considered “closely held”.  As it relates to a corporation, that means having 35 or fewer shareholders.  Shareholders are the individuals that hold stock in the corporation – they are the owners.  Being a shareholder in a closely held corporation has both pluses and minuses, just as being a shareholder in a publicly traded company does. 

A shareholder in a closely held corporation usually has more say in how the business is run than in a publicly traded corporation.  Your vote of one stock as a shareholder with less than 35 shareholders has more weight than your vote of one stock of the more than 16 billion shares of Apple stock outstanding.  For instance, if there are 20 shareholders in your closely held corporation, your one share accounts for 5% of the vote where your one share of Apple stock accounts for .00000000625% of the vote.  Easy to see how your one share goes much further in a closely held corporation.

Additionally, shareholders in a closely held corporation generally play a much larger role in the day-to-day decision-making of a corporation than they do in a large publicly traded corporation.  These closely held corporation shareholders usually have a closer relationship with the directors of the corporation. They are quite often employees of the corporation, and/or even may be directors in the company.  The vast majority of Apple shareholders do not have a direct line to the directors of Apple and do not know what product Tim Cook plans to roll out next.

When it comes time to sell, however, it is much easier to sell your stock of Apple than it is to sell your stock in a closely held corporation.  Most often, the closely held corporation will have buy-sell restrictions that mandate the stock first be offered to the other shareholders and then to the corporation before an individual can try and sell their stock to a third-party.  The buy-sell agreement or shareholder agreement will also often have a formula for how to value the stock and may contain minority discounts (lacking control over the corporation) or lack of marketability discounts (no readily available market to sell the stock) which further decrease the value of the stock.

Selling your stock in Apple is much easier.  There is a readily available market for such transaction with easy access through your brokerage account.  Your stock is worth what the market will pay – an amount which is easy to determine.  

Both sizes of corporations have their role as do their shareholders.  Small businesses are the lifeblood of our Country.  Large corporations also provide substantial value by way of jobs, product creation, etc.  There is not a right or wrong answer as to what type of corporation to invest in – one should recognize the pros and cons of each style of stock ownership.