A company controlled by the directors or by five or less participants (for this purpose a director could be a person who is not specifically appointed). It suffers from various disadvantages, the principal one being that it may be liable to a tax direction; that is, if the tax inspector is of the opinion (and there are certain tests) that insufficient profits are being distributed in )rder to avoid tax, he may make a direction that a certain proportion of the undistributed profits are to be treated as distributed for the purposes of collecting tax (they are theoretically apportioned among the persons who would have received them). There ivere also serious restrictions on directors' ees and directors' emoluments, but these have for the most part been removed by the Finance Act 1969.
It is often difficult to decide whether a company is a close company or not. This is because 'director' and 'participant' are such vague terms. The word participant does not necessarily mean one person: it includes all the persons associated with him - his lineal descendants and antecedents, his brothers and sisters, his wife. It also includes the trustee of any settlement made by one of his associates, fellow beneficiaries in a trust founded by an associate, and also associated companies. Directors are not only those people named as such, but also persons receiving money for work done for the business, and owning 20 per cent or more of the ordinary shares. On the other hand, where the public are beneficially interested in 35 per cent or more of the voting capital, this is prima facie evidence that the company is not a close company. The public of course does not include directors, associates, etc.
|Reference: The Penguin Business Dictionary, 3rd edt.|