We spill a lot of ink on the Canna Law Blog talking about different types of business entities that cannabis entrepreneurs often use. In most cases though, the choice is between LLC and corporation. It may come as a surprise to some readers that some states have many different subcategories of corporations, including California. Today I want to examine a rare, though sometimes useful entity: the California close corporation.
¿Qué es una sociedad anónima cerrada?
You’ve probably heard the term “closely held corporation” tossed around quite a bit. The term usually refers to a corporation with few shareholders, or a corporation with shares that are not publicly traded. However, a closely-held corporation is different from a close corporation, which is actually a special type of California corporation formed per section 158 of the corporations code. If you’re wondering what the state calls a run-of-the-mill corporation, the term is “general stock corporation.”
A close corporation has a few key features that distinguish it from a general stock corporation (or one of the other dozen or so corporation types that exist in the Golden State):
- The articles of incorporation and stock certificates must state that the entity is a close corporation
- It can only have 35 shareholders – if there are more than 35 shareholders , the company stops being a close corporation regardless of what the articles or stock certificates say.
- The main governing document is a shareholders agreement which can relax many of the normal formalities that would apply to a general stock corporation. More on that below.
¿Por qué elegir una sociedad anónima cerrada?
Las sociedades anónimas cerradas pueden ser ideales para empresas más pequeñas cuyos accionistas desean constituir una sociedad anónima, pero sin las formalidades que ello conlleva. Como se ha mencionado, los accionistas pueden relajar muchas de las formalidades habituales de una sociedad anónima general, incluyendo incluso la participación en la gestión de una sociedad anónima cerrada, algo reservado a los directores y ejecutivos de una sociedad anónima general. Las sociedades anónimas cerradas también pueden variar las disposiciones de distribución, al igual que ocurre con las sociedades de responsabilidad limitada (LLC).
So for small ventures with only a few shareholders that do not want to adhere to strict corporate formalities but who still want the corporate form, close corporations can offer some unique benefits. But there are still some drawbacks.
Cuándo evitar una sociedad anónima cerrada
Las sociedades anónimas cerradas, por definición, están limitadas a un grupo fijo de personas (35). Esto es ideal si los accionistas desean mantener la privacidad, pero no tanto si quieren recaudar fondos y vender acciones. Por supuesto, podrían «convertirse» en una sociedad anónima general, pero eso significaría que tendrían que cambiar radicalmente la gobernanza de la entidad para hacerlo.
Additionally, shareholders in close corporations also need to be concerned with liability issues to the extent they participate in the management of the company. In your average general stock corporation, shareholders have very limited liability, because they simply passively own a piece of the pie. But once that changes and they start running the show, they may have duties to their co-shareholders that could lead to disputes when things go south.
One other thing that may deter founders from forming close corporations is the fact that any shareholder can file a petition to involuntarily dissolve a close corporation. This is different from a general stock corporation where only shareholders with larger percentages of equity could initiate such a proceeding. In other words, in a two-shareholder close corporation where one has 99% of the stock, the 1% shareholder could initiate a dissolution proceeding.
The involuntary dissolution petition issue could probably be handled in a shareholders agreement, but these are often overlooked, even with close corporations. And failing to get a shareholders agreement could be a huge problem that undoes a lot of the benefits of forming a close corporation in the first place.
¿Necesitas ayuda con la legislación sobre el cannabis en California?
In future posts, I’ll make sure to outline some of the less common entity types that cannabis companies sometimes explore. But overall, I don’t see close corporations used often in the cannabis industry. There are definitely companies that could benefit from this more “exotic” form of entity, if done correctly.
