What is a Close Corporation in California

In California, Close Corporations are creatures of statute. They are not judicially created as they can be in other states. Therefore, in order to benefit from the legal protections of a Close Corporation, it must be properly formed and meet all statutory requirements.

A Close Corporation is designed to give its shareholders more control over the operations of the business and allow for a flexible management model. A California Close Corporation may not have more than 35 shareholders. It must have a written Close Corporation agreement, Articles of Incorporation, and active management by shareholders.

Complying with specific statutory requirements allows a Close Corporation to reduce the risk of creditors piercing the corporate veil and reaching the owners’ personal assets.  California law states that:

“The failure of a close corporation to observe corporate formalities relating to meetings of directors and shareholders in connection with the management of its affairs, pursuant to an agreement authorized by subdivision (b), shall not be considered a factor tending to establish that the shareholders have personal liability for corporate obligations.” Cal. Corp. Code § 300.

It is also important to note that majority shareholders in a California Close Corporation are still subject to the same fiduciary duties that any director or officer of a corporation would have. Breaching these duties could result in liability against the shareholders individually.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

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