Question

Discuss the limited liabilibilty of a stockholder in a closely held corporation. Analyze the possibilities of challenges and if there are any cases that have been successful.

Answer 1

Limited libility is a libility which a shareholder bears in case of loss which does not exceed the amount invested by the investors. A closely held corporation is the one which has limited number of shareholders . The stocks are traded publicly but only occasionally.Number of shares issued are in large numbers which make the firm to be eligible to list itself on the stock exchange.The corporations owners have power and control of a company in the decision making process as they has highest stake in the firm .Publicaly traded company has to abide the obligations of its director in the event of profit sharing, but closely held corporations has its own choices to reinvest, giveaway in a charity ot to distribute among the investors. The libilities are limited here , in case of loss, the investors has to bear it but only for the amount they had invested. The owners of such firm has more freedom in taking risks and decisions , in short these firms are flexible in managerial decisions.

Challenges

Fund Raising

Such firms face many problems while rasing the capital for its growth. Banks provide loans only when a firm has good history , reputation and clean repayment loan history. Owing to the limited number of investors, equity capitals are harder to gain. Investors won't invest again without getting good returns.

Competition

The big players in the market dominate over small companies. Closely held corporation faces tough challenge to deal with rising competition. In order to survive in the market, the firms require capital for various activities which is hard to raise. The optimum utilization of resources has to be made in order to cut the cost.

Sale

Selling the closely held corporation is difficult . The buyer and seller has different opinion in terms of the value of the company. The disagreement leads to failed deal .

Divesting of shares

The shares in a closely held corporation has limited options to sell. An investor can sell his share to only those person who are already a stockholder. This process takes time unlike publicly traded comanies.

Taxation

Such corporations generally has to pay higher tax compared to publicaly traded companies.Strict documentation is required to avail tax benifits.