A “statutory close corporation” is a corporation with thirty-five (35) or fewer shareholders that has elected to be treated as such by adding a paragraph to the Articles of Incorporation. There are a number of features available in Georgia with this type of corporation. However, there are three major features that are most important.
- The first major feature is reduced formality. In this case, less is better. When a corporation is involved in a lawsuit, it is common for the other side to challenge the validity of the corporation on account of the failure to follow corporate formalities, i.e. keeping complete, timely and up to date corporate minutes. The failure of a statutory close corporation to observe the usual corporate formalities or requirements relating to the exercise of its corporate powers or management of its business and affairs is not a ground for imposing personal liability on the shareholders for the liabilities of the corporation. There is very little Georgia case law on this subject. It is uncertain as to how far the courts will go in excusing corporate formality, but clearly, less required formality is better for most businesses.
- The second major feature is that the Georgia statute provides a simple “right of first refusal” requirement between shareholders. What this means is that if one shareholder wants to sell out and finds a buyer, the other shareholder(s) have the right to match the offer. The statute works relatively well if the ownership interest among shareholders is relatively balanced. It does not work well if one shareholder is the driving force behind the business and other shareholders are less important to the business. In that case, the powerful shareholder would want a custom shareholder buy-sell agreement that favors the powerful shareholder, and not a “one size fits all” statutory right of first refusal. All shareholders would be better off with a custom shareholders’ agreement covering buy outs and a number of other issues not addressed by the close corporation statute, but statistically, few enter into these valuable agreements. Please contact us if you would like more information on shareholder agreements.
- The third feature is the ability to not have a Board of Directors. This is really an extension of the first feature of less formality. Not having to have perfunctory board meetings is appealing for most businesses. There is one result of not having a Board of Directors that must be considered. When a corporation has three or fewer shareholders, it is typical that all three shareholders are on the Board of Directors and all such shareholders have an equal voice in running the corporation. This is “per capita” voting. If the board of directors is eliminated, voting is by percentage of ownership in the company. If all shareholders have an equal number of shares, there is no difference in the voting strength. However, if ownership is not equal, voting strength can be quite different. For example, a corporation has one 60% shareholder and two 20% shareholders. If there is a Board of Directors consisting of all three shareholders, the two 20’s can outvote the 60. However, if there is no Board of Directors, the 60 can outvote the two 20’s.
Assuming you do not wish to have a custom shareholder agreement, the following profiles should help you reach a decision.
Choose a Close Corporation Without Directors, if you will have:
- One shareholder with no plans to add another shareholder;
- More than one shareholder with each owning the same percentage; or
- More than one shareholder with each owning different percentages that want to vote by percentage interest.
Choose a Close Corporation With Directors, if you will have:
- More than one shareholder with each owning different percentages that want to vote per capita.
- The type of business that your business prospects will expect to have a Board of Directors (franchising, for example).
** If you are still not sure whether you should be a Close Corporation With or Without Directors, consider the following: There are a few narrow areas in the law where a director is subject to personal liability for making poor decisions. There is a very subtle distinction in Georgia law that may give “directors” more of a cushion from personal liability. Georgia law allows the Articles of Incorporation to provide for director exculpation for certain acts. The law does not expressly provide for exculpation of a shareholder of a statutory close corporation without a board of directors for the very same acts. Although this may never be an issue for your corporation, you may want to be a director just in case.
Choose a Standard Corporation Without Electing Close Corporation Status, if you will have:
- One powerful shareholder that rules the corporation with one or more junior shareholders. A custom shareholders’ agreement is strongly advised in this situation; or
- One or more shareholders rule the corporation and want to give key employees stock ownership as an incentive. A custom shareholders’ agreement is strongly advised in this situation.