Corporate Law Blog

Supreme Court decision highlights definition of closely held corporation

Many of our readers have already heard about the recent U.S. Supreme Court decision granting for-profit, closely held corporations the right to opt out of the federal contraceptive mandate. Because the scope of the decision was limited to such companies, it isn’t as far reaching as some had hoped for, although some commentators have pointed out that the language of the decision doesn’t make it entirely clear which businesses are affected.

While many readers are familiar with what publicly traded companies are, not as many are familiar with closely held corporations. Not surprisingly, the designation is understood most clearly by looking at it from the perspective of tax law. According to the Internal Revenue Service, a closely held corporation is one in which over half of the company stock is owned by nor more than five individuals at any given point in the second half of the year. 

Other definitions for closely held corporations are out there, though, with one simply considering them corporations with a limited number of shareholders. Under this definition, S corporations would be included since they also have a limited number of shareholders—no more than one hundred. S corporations do not pay income taxes—individual shareholders do this on their personal tax returns. Hobby Lobby in an S corporation. It is unclear which definition the court was referring to in its decision. Depending on the definition used, more or less employees could be affected by the decision.

Whether or not a company is best organized as a closely held business or a publicly traded business is not always an easy decision, and it can certainly help to work with an experienced attorney not only in determining the best way to organize a business but also in meeting all legal requirements in running that business. 

Source: Pew Research Center, “What is a ‘closely held corporation,’ anyway, and how many are there?” Drew Desilver, July 7, 2014.