In the UK, the terms closing the company and close company are completely different. It has no effect on sole traders or LLP. The only one affected are private limited businesses. Now, you may wonder what is a close company and who are the participators?
This guide will help you understand a close company, the rules and regulations that apply to it, along with its pros and cons.
Definition of a Close Company
Any business that is run by a few people and not held as a stock or listed publicly is a close company. Usually, this results in the limitation of ownership. Only a certain amount of people hold most of the shares.
The definition of a close company includes:
- There are five or less than five participators.
- The number can change if the participators are directors.
To avoid having its stakeholders easily changed, this sort of business restricts ownership and control.
What is a Close Company Participator?
To become a participator in a close company, you need to hold an ownership stake. You can hold it as a director, investor, or shareholder. This gives you the authority to make decisions to an extent. The extent depends upon factors such as the structure and size of the organisation.
Each company has different circumstances, affecting the definition of a participator. Having active people is necessary for organisations to develop and succeed.
Companies that are not Considered a Close Company
Many companies do not fall under the category of a close company. They include the following:
- Companies that are controlled by the Crown.
- Any building society.
- A company listed on the stock exchange.
- Any company that is managed by a non-UK resident company.
- A company that is under control of a close company.
- Every company in which members of the public hold 35% of share capital.
Several factors determine if a firm is a close company. You must consider all this to make an informed choice regarding your company.
Tax Rules for a Close Company
Specific tax rules exist for close companies. Starting tax and small business rates can benefit close companies.
Companies must meet reporting requirements to comply with regulations. An example of such reporting is to state the correct value of their assets regularly. Also, companies must give detailed financial statements to the proper authorities.
Furthermore, factors such as size and industry determine additional taxes that close companies may owe. Whatever the situation may be, close companies must understand tax rules. This way, they can reduce any potential financial or legal liability.
The best way to guarantee compliance is to reach out and work alongside an expert account, or maybe even a tax advisor.
The Pros of a Close Company
Depending upon the requirements and goals of the organisation, the pros of being a close company vary accordingly.
A great example of an advantage a close company benefits from is more control over operations. Not only this, but also over the processes of decision making. In case there is any strategy that the management team wants to implement, then this is a significant advantage.
Additionally, you can build trust and form strong relationships by working with other member of the team in a close company. This leads to substantial achievements.
As compared to other forms of businesses, a close company has fewer overhead expenses. This is because there is no middle management. Therefore, profit increases and expenses decrease. Resulting in benefits for both shareholders and employees.
There are plenty of benefits of being a close company. You now have a better understanding of what is a close company and its advantages.
The Cons of a Close Company
As always, there is a downside. Unfortunately, a close company has cons as well. The most obvious con of a close company is that you cannot operate independently to a full extent.
The decisions and needs of the participators are also a determining factor in your operations. Conflicts can arise as the shareholders have direct involvement in the daily operations of the company.
Moreover, there is greater risk involved in a close company as compared to larger public companies. Take, for example, the possibility that investors might not want to put their money in a small business that does not have much recognition. As compared to larger companies, a close company does not have the same amount of recognition.
Also, it is questionable when owners leave or retire. As people wonder who now holds the leadership position. Which begs the question: how fair are the succession plans? Now, it is clear to you what is a close company and its disadvantages.
More control over operations and decision making
Limited independence in operations
Building trust and strong relationships among team members
Potential conflicts due to direct shareholder involvement
Fewer overhead expenses, leading to increased profits
Greater risk and limited recognition compared to larger companies
Uncertainty and potential challenges with succession planning
Investing in a Close Company
The public cannot usually invest in a close company as the participators hold the shares.
A major cause behind this is also that most close companies are owned by families or owner operated. It is most likely that people who form close corporations want to restrict their business dealings. They do not want outsiders investing in their company, as they want to have full control. Usually, individuals prefer to manage and operate on their own.
This results in limitations to the number of people that can buy shares. Therefore, non-insiders have a hard time investing in such businesses.
Still, there are exceptional cases where an outsider has the chance to buy shares of a close company.
For example, there could be an initial public offering (IPO). This happens when the founders of the company decide to sell shares publicly.
They can offer assets via an open auction. Which is also called an asset sale. Restrictions can still apply in such cases.
Outsiders cannot buy shares in a close company, but there are exceptions in certain conditions. Hence, you now understand what is a close company and if outsiders can invest in it.
Is it Possible for a Close Company to Pay Dividends?
Publicly traded companies are not the only ones that can pay dividends to their shareholders. You might find it surprising that many close companies provide dividends to their investors. Although, you must consider some factors when looking at this option.
Firstly, a close company must run under the terms of its governing documents. These documents might mention the rules pertaining to the distribution of dividends.
Not to mention, you must consider dividend payments from a tax viewpoint. There may arise a tax liability if the overall payout is too high.
Lastly, the most important thing for shareholders to know is that dividend payments must have a structure. This is to avoid negligence claims or any other problems.
Consequently, close corporations are suitable solutions for dividing profits among investors. Yet, planning and considerations are necessary to ensure success.
What if Shareholders of a Close Corporation Disagree?
Serious issues can arise if shareholders of a close corporation don’t agree with each other. Disagreements about finances can slow down business growth.
Simultaneously, clashes between shareholders can dismantle teamwork and relationships.
Since all shareholders must agree on terms, a close company should have steadfast methods to deal with the issues.
Every business should state transparent policies and guidelines in the shareholder agreement. This will help avoid potential disputes.
Alternatively, you can use an independent mediator. They will help stakeholders to agree to compromise.
Conflict resolution must be thorough, open, and fair. Hopefully, this clarifies what is a close company and what happens when shareholders disagree.
What if a Shareholder Leaves a Close Corporation?
Any time a shareholder leaves, the remaining shareholders receive their shares.
This keeps the overall ownership within the company. Every shareholder still has a proper extent of control over the business.
Or the shares of the former shareholder are forfeited. Obviously, after agreement. Therefore, the remaining shareholders still maintain complete control.
Shareholders must reach a fair agreement on time about the shares of the departed shareholder. This avoids any confusion or conflict that may arise.
The circumstances vary according to each individual business. Thus, make your decision accordingly. This thoroughly explains what is a close company and what happens when a shareholder leaves the company.
The Difference Between Public and Close Company
How is a close company different from a public company? Well, the answer lies in the structure of ownership. As you know, in a close company, shareholders have direct control over the operations. Whereas, in a public company, multiple shareholders have ownership but are not always involved in its management.
The level of accessibility and clarity is also a stark difference between the two forms of business.
Public companies need to provide financial reports. They offer these reports are to the public, stockholders, and shareholders. In comparison, a close company does not need to meet any such requirements to report. Therefore, it gains more control over its finances.
Public companies must follow rules for disclosing information. No such rules apply to businesses that are privately held.
Lastly, another determining factor is the market pressure. Investors can only buy and sell stocks if the company in question has active trading schedules. This is a major reason for a business going public or staying private.
To conclude, there are many factors that make a company close or public.