Gino Zavarella Attorney and Counselor at Law 216-831-8678
Close Corporations and §1701.591 of the Ohio Revised Code
Corporate Formalities. Corporate law includes any number of "corporate formalities" which must be adhered to. These formalities start with the incorporation of the company with the Secretary of State but the corporate formalities have only just begun once the Articles of Incorporation have been filed. What sort of acts is a corporation obligated to perform - to name but a few:
Annual Meetings of Shareholders Annual Meetings of Directors Maintenance of the Corporate Minute Book
Was a company to neglect these formalities trouble could ensue. To maintain the protections afforded shareholders of a corporation (i.e. limited liability), it is important to maintain the formalities. Many companies, especially large corporations, spend and dedicate immense resources to perform these acts. It is also possible to utilize forms available at office supply stores, which is popular with smaller entities, especially S Corporations.
It is also possible to minimize or avoid these acts entirely!
§1701.591 ORC. This section of the Ohio Revised Code allows a corporation to elect to be treated as a "close corporation". In this way the entity may streamline (or even avoid) adherence to the usual corporate formalities. This statute provides that a corporation will not lose its status as a corporation merely as a result of operating as a partnership. The statute further provides that the failure to adhere to corporate formalities which relate to meetings of shareholders and of directors should not be considered when determining whether or not to pierce the corporate veil and thus impose personal liability on shareholders.
Your Business. If your business is a smaller entity and there are - and will only remain - a few individuals owning shares of the corporation you may want to consider en election under §1701.591 ORC; especially if you want to avoid some or all of the paperwork attendant to your decision to incorporate. And it is also important to know that your Internal Revenue Subchapter "S" election will not be affected. [If your corporation is a smaller entity you may also consider an "S" election for tax benefits if you have not already done so.] It is probably not advisable to make a close corporation election if the business has future plans for large expansion, a great number of shareholders, venture capital or other similar financing or if there is a shareholder who may not remain part of the corporation. It is also important to consider a Buy-Sell agreement and Restrictions on the transfer of stock for the close corporation. As with any issuance of stock, Federal and State securities laws are applicable but it is very likely that the typical close corporation will be able to operate under and exemption from these rules (see Memorializing Exempt Securities, p. 2). Overall Ohio Revised Code §1701.591 provides a great convenience for many businesses held by a few individuals and whose day-to-day operations resemble partnerships.