About Closely-Held Businesses
Closely-held corporations (“CHCs”) are private enterprises with a tight and often personal ownership circle. They differ from public companies with diffuse shareholders who hardly know each other. About 90% of CHCs are family-run, while others are (or were) start-ups by one or two entrepreneurs, perhaps with other investor and independent directors.
With CHCs, the people have to work closely together over a long period. They need to trust and respect each other, and share a vision and values. When problems arise, they can become very personal and very harmful to the company.
Here are some forms of CHCs.
Though the term ‘partnership’ is used broadly (including in this book), it also refers to a specific legal entity. In essence, it refers to a form of business that is not a sole proprietorship but is also not a corporation. Such businesses are easy to start by any two or more entrepreneurs because there is little required structure. They are risky, though, because there is no legal difference between you and your business (so personal assets would be used to pay off business debt). And if your partner does something stupid, you are held financially responsible. Partnerships create an ongoing business relationship through a partnership agreement. They can be registered as a business entity with the government, and are governed by the rules in the Ontario Partnership Act.
For those who want more liability protection, as many do, there are options:
Limited partnerships have limited liability for specified individuals (to the extent of their investment in the partnership) for liabilities of the partnership. There is a general partner (which is usually a corporation) and one or more limited partners. The limited partners cannot participate in the management of the business. This form is often the vehicle of choice for raising money for certain kinds of ventures, where venture capital investors (‘VCs’) are offered this protection.
Don’t confuse a limited partnership with a Limited Liability Partnership (LLP). A limited liability partnership is a general partnership in which liability of even the general partners is limited. Many law and accounting firms are of this type.
And don’t confuse “partnerships” with Joint Ventures, at least in the legal sense; though their similarities can lead to legal confusion. Joint ventures are usually one-off projects, limited in time and scope. As with other forms, do up a contract to avoid problems.
When you incorporate your business, it is considered to be a legal entity that is separate from the shareholders. Shareholders will not be personally liable for the debts or acts of the corporation. Whether you are now Inc., Corp., or Ltd. doesn’t matter, just that you have done it. A good time to do it, for the lower tax rate, is when revenues start to exceed annual living expenses. However, be prepared for the legal requirements and give more attention to your structure.
Most corporations are family-owned enterprises. They can still be considered such even when much of the ownership has been transferred out, and the management is largely in non-family hands. But as long as important decisions are still affected by the family’s ownership stake, that’s what you’re dealing with.
Incorporation means you need directors of the corporation, and (assuming there’s more than one) a board that meets, with by-laws and other rules. Do you have investors who will sit on the board? Independent outsiders like other CEOs? Who will be Chair? I hope you’ll have a Shareholders’ Agreement. I’ll discuss some of these points in a later blog.