Statutory Close Corporation

November 21, 2017

A statutory close corporation can simplify the complexities of your business life.  When I first started practicing law in 1985, I was practicing with my father.  He represented over 75 corporations, and most of them were small businesses that were run by husbands and wives, brothers, or just two friends.  They very rarely had more than two or three owners.

The first December after I graduated from law school, my father took me to the firm library, pointed out the corporate books and said, “Go through all of these corporate books, contact the clients, set up an annual meeting date, and then make sure their corporate minutes are done properly.”  I said, “Dad, they just passed a new law called the statutory close corporation law as part of Chapter 180.  It allows people to operate without a board of directors, without annual minutes or meetings, and to act as designated directors, and one person can be all the officers if necessary.”  He said, “Well that is an outstanding idea.  Go through all our books and see who would be appropriate for changeover to that type of operation and make the change for them.”  Three-quarters of the corporations that my dad represented were one- or two- shareholder operations.  We changed them over to statutory close corporations at that time, thereby alleviating the necessity for them to have annual meetings and minutes, going forward.

What is a statutory close corporation?  A statutory close corporation can be created under Chapter 180, Subchapter XVIII, of the Wisconsin Statutes.  To elect statutory close corporation status, a corporation must have 50 or fewer shareholders at the time it elects close corporation status.  Its Articles of Incorporation must contain a statement that the corporation is a statutory close corporation under sections 180.1801 to 180.1837.  A summary of key provisions of a statutory close corporation are:  (i) it can operate without bylaws; (ii) it can operate without a board of directors; (iii) it gives protection to shareholder agreements essentially elevating shareholders to the same level as a corporation; (iv) it can be taxed as either C corps or S corps; and (v) as previously mentioned, it is not required to hold annual meetings or maintain formal records.

The real beauty of a statutory close corporation is that the failure of a statutory close corporation to observe corporate internal formalities or requirements relating to the exercise of its corporate powers in the management of its business and affairs, cannot be grounds for imposing personal liability on the shareholders for the obligations of the corporation.  You still need to keep internal books and keep the corporation separate.  However, failure to follow any internal corporate formalities shall not make the shareholders liable for obligations of the corporation.

Statutory close corporation status can be elected at any time by a corporation formed under Chapter 180.  Another beautiful part of the statute is it automatically cleans up a corporation’s corporate book.  What that means is that if you have not maintained your corporate book for the last 10 years and you elect statutory close corporation status, the failure to maintain the corporate book in the years prior to electing statutory close corporation status cannot be used to pierce the corporate veil, or to take effect from any corporate action taken during the period before election of statutory close corporation status.  For example, if the corporate book was not maintained, and the corporation has a retirement plan and the corporation is audited, one of the first things the Internal Revenue Service will do is ask for a copy of the corporate book to ensure that the implementation of the retirement program was properly done within the corporation.  An election of statutory close corporation status removes that argument and requires the IRS to recognize that all decisions of the corporation prior to the close corporation status were properly accomplished.

Corporations that should not elect statutory close corporation status are corporations with multiple classes of stock, corporations that have outside investors, or corporations whose shareholders are not part of the daily operation of the corporation.  For those entities, a formal system of regular meetings is important to apprise investors and non-participatory shareholders as to the actions being taken by the corporation, and give them a forum in which to express their views and/or desires with regard to corporate actions.

Much like when I began practicing law, I would say that over 85% of the corporations that I either incorporate or come to represent throughout the course of my practice have either been initially set up as statutory close corporations or elected statutory close corporation status once I explained to them the benefits thereof.

In closing, statutory close corporations are a wonderful way for corporations with very few shareholders to operate in an informal manner as to their corporate formalities.  It essentially recognizes that most corporations with few shareholders do not regularly engage in the maintenance formalities as required under Chapter 180 of the Wisconsin Statutes.

If you are interested in seeing whether a statutory close corporation is right for you, contact one of our corporate lawyers at Axley.  We will be happy to walk you through the process to determine whether incorporating as a statutory close corporation or electing statutory close corporation status post-incorporation is right for you.