A private corporation, also called a closely-held company, is a business that is generally owned by a small group of investors. This type of business still has to satisfy the same requirements to operate its company as a regular corporation. A family business organized as a corporation is a typical example of a private corporation, but Ikea and other big businesses also operate as a closely-held company.
A private corporation has to file paperwork with their state government agencies, which includes Articles of Incorporation, business name, and any other licenses and permits needed to operate the business. There are fees associated with these filings and the amounts vary by state. Owners must also create bylaws, appoint and hold meetings with directors, and offer initial stock to shareholders. The corporate business structure establishes the company as a separate entity, giving the owners liability protection against business obligations.
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The taxation of private corporations is the same as regular corporations. The profits of private corporations are taxed by favorable corporate tax rates, which can be as low as 15 percent. The remaining profit can be distributed as dividends to shareholders, or some of it can be retained in the corporation to cover business improvements. Up to $250,000 can be retained by private corporations. Shareholders get their dividends and have to report those amounts as taxable incomes.
The stock issued by a private corporation is not available to the public. Generally, stock from a private company is held by the owners, employees, and family members of the employees, or by outside investors who meet certain requirements. For example, some companies may sell stocks to investors with high incomes. The stock price, value, and number of shares available are only known to those who are eligible to become owners. A private corporation doesn't have to file this information with the Securities and Exchange Commission.
By definition, shareholders are owners of a corporation who purchase shares of stock in the company. This is true for shareholders of private and public corporations, but there are some advantage that shareholders in a public corporation enjoy over those who hold shares in a private corporation. For example, a private corporation doesn't have to answer to shareholders. The company can make business decisions without consulting or getting the approval from shareholders. Also, shareholders generally do not have access to the account books and other financial information of a private corporation unless the permission is written in the shareholder agreement.
A private corporation that meets certain requirements can elect to be taxed as an S corporation. An S corporation has more restrictions than the other tax classification of C corporation, including a limit on the number of shareholders and class of stock the company can offer. An S corporation is taxed by the pass-through method, which flows profits and losses to shareholders. This method prevents double taxation of corporate profits. A regular private corporation can switch to an S corporation by filing Form 2553 with the IRS.