Various attempts at definition of the close corporation have been made. For a collection of those most frequently proffered, see O'Neal, Close Corporations, § 1.02 (1958). For our purposes, a close corporation is one in which the stock is held in a few hands, or in a few families, and wherein it is not at all, or only rarely, dealt in by buying or selling. (Brooks v. Willcuts, (8th cir. 1935) 78 F.2d 270, 273.)
Many courts in many decisions have addressed the distinctive nature of the close corporation (e.g., Brigham v. M. & J. Corp. 352 Mass. 674, 678 ; see Samia v. Central Oil Co. of Worcester, 339 Mass. 101, 112-113 ), but have never defined precisely what is meant by a close corporation. \There is no single, generally accepted definition. Some commentators emphasize an 'integration of ownership and management' (Note, Statutory Assistance for Closely Held Corporations, 71 Harv. L. Rev. 1498 ), in which the stockholders occupy most management positions. Kruger v. Gerth, 16 N. Y. 2d 802, 806 (1965) (Fuld, J., dissenting). Foreward, 18 Law & Contemp. Prob. 433 (1953). See Helms v. Duckworth, 249 F. 2d 482, 486 (D. C. Cir. 1957). Others focus on the number of stockholders and the nature of the market for the stock.
In this view, close corporations have few stockholders; there is little market for corporate stock. The Supreme Court of Illinois adopted this latter view in Galler v. Galler, 32 Ill. 2d 16 (1965): 'For our purposes, a close corporation is one in which the stock is held in a few hands, or in a few families, and wherein it is not at all, or only rarely, dealt in by buying or selling.' Id. at 27. Accord, Brooks v. Willcuts, 78 F. 2d 270, 273 (8th Cir. 1935). See, generally, F. H. O'Neal, Close Corporations: Law and Practice, § 1.02 (1971). O'Neal restricts his definition of the close corporation to those corporations whose shares are not generally traded in securities markets. F. H. O'Neal, Close Corporations: Law and Practice, § 1.02 (1971). Many courts accept aspects of both definitions and deem a close corporation to be typified by: (1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.
As thus defined, the close corporation bears striking resemblance to a partnership. Commentators and courts have noted that the close corporation is often little more than an 'incorporated' or 'chartered' partnership. The United States Internal Revenue Code gives substantial recognition to the fact that close corporations are often merely incorporated partnerships. The so called Subchapter S, 26 U. S. C. §§ 1371-1379 (1970), enables 'small business corporations,' defined by the statute (26 U. S. C. § 1371 [a] ), to make an election which generally exempts the corporation from taxation (26 U. S. C. § 1372 [b]  ) and causes inclusion of the corporation's undistributed, as well as distributed, taxable income in the gross income of the stockholders for the year (26 U. S. C. § 1373 [a] ). This is essentially the manner in which partnership earnings are taxed. See 26 U. S. C. § 701 (1970). Ripin v. United States Woven Label Co. 205 N. Y. 442, 447 (1912) ('little more than [although not quite the same as] chartered partnerships'). Clark v. Dodge, 269 N. Y. 410, 416 (1936). Hornstein, Stockholders' Agreements in the Closely Held Corporation, 59 Yale L. J. 1040 (1950). Hornstein, Judicial Tolerance of the Incorporated Partnership, 18 Law & Contemp. Prob. 435, 436 (1953). Cf. Barrett v. King, 181 Mass. 476, 479 (1902).
The stockholders 'clothe' their partnership 'with the benefits peculiar to a corporation, limited liability, perpetuity and the like.' In the Matter of Surchin v. Approved Bus. Mach. Co. Inc. 55 Misc. 2d (N. Y.) 888, 889 (Sup. Ct. 1967). In essence, though, the enterprise remains one in which ownership is limited to the original parties or transferees of their stock to whom the other stockholders have agreed, in which ownership and management are in the same hands, and in which the owners are quite dependent on one another for the success of the enterprise. Many close corporations are 'really partnerships between two or three people who contribute their capital, skills, experience and labor.' Kruger v. Gerth, 16 N. Y. 2d 802, 805 (1965) (Desmond, C.J., dissenting).
The original owners commonly impose restrictions on transfers of stock designed to prevent outsiders who are unacceptable to the other stockholders from acquiring an interest in the close corporation. These restrictions often take the form of agreements among the stockholders and the corporation or by-laws which give the corporation or the other stockholders a right of 'first refusal' when any stockholder desires to sell his shares. See Albert E. Touchet, Inc. v. Touchet, 264 Mass. 499, 502 (1928); Hornstein, Stockholders' Agreements in the Closely Held Corporation, 59 Yale L. J. 1040, 1048-1049 (1950). In a partnership, of course, a partner cannot transfer his interest in the partnership so as to give his assignee a right to participate in the management or business affairs of the continuing partnership without the agreement of the other partners. G. L. c. 108A, § 27. See Hazen v. Warwick, 256 Mass. 302, 308 (1926).
A closely-held corporation cannot be defined with exactitude. Generally, it is a 'corporation in which the stock is held in a few hands, or in a few families, and wherein it is not all, or only rarely, dealt in buying and selling.'' John K. Gray, 'Proving the Value of Goodwill of a Spouse's Closely-Held Commercial Corporation in a Divorce Proceeding,' 25 J. Fam. L. 549, 550 (1986) (quoting Lavene v. Lavene, 162 N.J. Super. 187, 392 A.2d 621, 623 (N.J. Super. 1978)). In valuing the assets of a closely-held corporation courts generally agree that 'goodwill is a recognized tangible asset of a corporation and should be considered when valuing a closely held corporation for the division of marital assets.' In re Marriage of Brenner, 235 Ill. App. 3d 840, 601 N.E.2d 1270, 1275, 176 Ill. Dec. 572 (Ill. App. 1992). Commonly, the purchase of a closely held corporation occurs in one of two ways.
Where the purchaser acquires the stock of the corporation, he ordinarily acquires all of the corporation's assets and liabilities. In this situation, the amount paid to the owner-seller for his stock ordinarily represents the net value of the business because the owner-seller is not obligated to pay off the corporate debts. The second method of purchasing a corporation or business is where the buyer acquires its assets. Under this arrangement, the market value does not equal the net value because the owner-seller will ordinarily be responsible for some or all of the business's debts or liabilities. Again, the pertinent inquiry is what is the net sum that will be realized by the owner of the business if it is sold for its fair market value. Tankersley, 182 W. Va. at 631, 390 S.E.2d at 830. The decision further held: The net value of a closely held corporation or business equals the net amount realized by the owner should the corporation or business be sold for its fair market value. The pertinent inquiry that must be made is whether the owner-seller will be responsible for the debts of the corporation or business, assuming a sale for its market value. Tankersley, 182 W. Va. at 631, 390 S.E.2d at 830.