Corporate Strategies to Structure and Fund Stock Redemptions in Closely Held Corporations

How does a closely-held business provide capital for future growth and additional shareholders when the older shareholders retire or no longer remain active in the business? Attracting future shareholders poses a problem. As a practical matter, shares of a closely-held corporation can be sold only to the remaining shareholders or to the corporation itself because of: (1) the lack of marketability of such shares, and (2) the reluctance of outside parties to invest in small corporations--especially to acquire a minority interest.

Both the shareholders and the corporation must acknowledge this lack of marketability and decide, in the event of the death or retirement of a shareholder, who should purchase the shares--the remaining shareholders or the corporation. This decision should be made well in advance of the actual transaction.