Definition
A Close Corporation Plan is a pre-arranged legal agreement among the shareholders of a closely held corporation to facilitate the purchase of a deceased stockholder’s shares by the surviving stockholders. This plan often includes a predetermined formula for valuing the shares, ensuring a smooth transition of ownership and preservation of control within the existing group of shareholders.
Examples
Small Family Business:
- A family-owned business implements a Close Corporation Plan to ensure that if any family member (shareholder) passes away, their shares can be purchased by the surviving family members. This arrangement prevents the entry of external parties and keeps the business within the family.
Private Tech Startup:
- Founders of a tech startup agree on a Close Corporation Plan specifying that in the event of a founder’s death, the remaining founders have the first right to purchase the deceased founder’s shares at a value determined by a predefined formula, ensuring stability and continuity in the company’s leadership.
Professional Service Firm:
- Partners in a law firm establish a Close Corporation Plan where partners agree to buy out any deceased partner’s interest based on the firm’s valuation metrics. This approach protects the firm’s operations and maintains client confidence in its stability.
Frequently Asked Questions (FAQs)
What is the main purpose of a Close Corporation Plan?
The primary purpose is to provide a mechanism to transfer the ownership of shares from a deceased shareholder to the surviving stockholders, ensuring business continuity and preventing external parties from gaining control.
How is the value of shares determined in a Close Corporation Plan?
The value is usually determined by a pre-agreed formula that may consider factors such as earnings, book value, or a valuation by an independent appraiser.
Who benefits from a Close Corporation Plan?
Both the corporation and the surviving shareholders benefit as it maintains control within the established group, prevents disputes, and ensures the deceased shareholder’s estate is fairly compensated.
Is a Close Corporation Plan only applicable to family businesses?
No, it can be implemented in any closely held corporation, including startups, professional partnerships, and closely held firms regardless of family ties.
How legally binding is a Close Corporation Plan?
When properly drafted and executed, it is a legally binding agreement enforced by corporate by-laws or shareholder agreements.
Related Terms
- Shareholder Agreement: A contract among a company’s shareholders describing how the company should be operated and the shareholders’ rights and obligations.
- Buy-Sell Agreement: A legally binding agreement that stipulates how a partner’s share of a business may be reassigned if that partner dies or otherwise leaves the business.
- Business Succession Planning: The process of planning for the continuation of a business after the exit of one or more owners.
- Valuation Methods: Techniques used to determine the current worth of an asset or a company, which can include market value, book value, or earnings-based methods.
Online References
- Investopedia - Close Corporation Definition
- IRS - Shareholder Agreements and Buy-Sell Agreements
- American Bar Association - Business Succession Planning
- Nolo - Corporate Buy-Sell Agreements
Suggested Books for Further Studies
- “Corporate Finance: The Core” by Jonathan Berk and Peter DeMarzo.
- “Business Succession Planning For Dummies” by Arnold Dahlke.
- “Valuation: Measuring and Managing the Value of Companies” by McKinsey & Company Inc.
- “The Complete Guide to Buying and Selling a Business” by Fred S. Steingold.
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