Structure and Governance of Small Firms & Other Closely Held Businesses

Large, publicly-held companies often dominate the headlines.  However, small business is as important; the number of small businesses is vastly larger; and many more lawyers deal much more often with small businesses, not big business. Small businesses are closely-held rather than publicly-held.  Closely-held means: the number of owners is small; ownership interests are not publicly traded on an established market; and, the owners take a more active role in the management and operation of the business.  Because of these differences, significant problems may arise in the closely-held context that are absent in the publicly-held setting.

For example, in many closely held businesses, the lack of a market effectively results in the lack of an exit for investors who disagree with the majority will and who would prefer to liquidate, or "cash out," their investments. The investment of an owner, in other words, can remain trapped within a closely held enterprise -- a situation that may call for judicial intervention, particularly if egregious majority conduct is involved. The lack of a market also increases the importance of other mechanisms for monitoring the managers of an organization, as the disciplinary effect of a market is, by definition, absent in a closely held business.

Also, the owners of closely held enterprises often expect to run their businesses in ways that differ dramatically from the operation of publicly held enterprises. For example, closely held business owners may want an active role in the management of the venture and restrictions on the transferability of ownership interests, in part because ownership and management rights may be linked in such ventures. Similarly, owners of closely held businesses are frequently connected by family or other personal ties, and there is often a desire to prevent "outsiders" from joining the organization. In publicly held entities, however, free and unrestricted transferability of ownership interests is the norm.

In combination, the number of closely held enterprises, the issues that uniquely affect closely held ventures, and the differing expectations of closely held business owners explains why the curriculum includes and begins with a separate course in closely-held business organizations.  The course touches on publicly held entities, but the focus is on the operation of closely held businesses and on the problems that such businesses commonly encounter in their typical forms, which are: the general partnership, the close corporation, the limited partnership, the limited liability partnership, and the limited liability company. Thoroughly covered, too, are basic agency principles which are the building blocks for many of the legal doctrines associated with these typical business forms.