Public Company vs. Private Company
The terms "public company" and "private company" can be confusing. To simplify:
A public company (sometimes called a publicly held company) is usually a corporation that issues shares of stock (a stock corporation). In a public company, the shares are made available to the public. The shares are traded on the open market through a stock exchange.
A private company is a stock corporation whose shares of stock are not publicly traded on the open market but are held internally by a few individuals. Many private companies are closely held, meaning that only a few individuals hold the shares. But some very large corporations have remained private. Cargill (the food producer) is the largest private company in the U.S. Some other familiar examples of privately held companies are:
- Mars Inc. (the candy company; think Mars Bars)
- State Farm (and various other insurance companies)
- Dell (computers)
- Publix Supermarkets (in the Southeast)
Advantages and Disadvantages
Both private companies and public companies are required to have a board of directors, an annual meeting, to keep meeting records, and to keep a list of shareholders and their holdings. But there are some big differences between how a public company and a private company operate.
Private companies can be corporations, LLC's, or partnerships, but if you want to take your private company public, you will almost certainly need it to be a corporation. Many states have restrictions on ownership of LLCs, so it's very difficult to take an LLC public.
A private company can decide to become a public company, but it's not as easy for a public company to become private. "Going dark," as it's called, requires that the shares be repurchased and that regulatory processes be followed.
Because public companies are selling to the public, these companies are subject to many regulations and reporting requirements to protect investors, including the Securities and Exchange Commission (SEC) regulations. Annual reports must be made public and financial statements must be made quarterly. Holding companies, which are set up to hold and control other companies, are almost always public companies.
Public companies also are, by definition, under public scrutiny. That is, their activities and the price of the stock are analyzed, and the activities of executives and board members are scrutinized. Annual meetings may be attended by the press, and anyone with just one share of stock can attend.
Private companies enjoy a measure of anonymity. The board may be small and well-known to each other. Sometimes all the shareholders are on the board. Decisions can be made relatively quickly, and the board can adjust quickly to changing conditions.
The value of each share in a public company is known, so it's easier to buy and sell shares. The value of shares in a private company is not as simple, and it may be difficult for a private company shareholder to sell shares. The valuation of the company, in general, is easier to determine for public companies.
The big advantage to having a public company is that equity investment is shared by a large number of people. That is, there are many shareholders, not just a few. The debts of a corporation must be paid, but the shareholders don't have to be paid in case of bankruptcy.
How a Private Company Becomes a Public Company
Many companies begin as private companies. The business starts small, often as a family business, and the family members and a few trusted advisors form the board of directors and the shareholders. As the company grows, it has more need for funds for expansion. At a certain point, the company may decide to seek those funds from equity sources (shares of stock) rather than taking on more debt. That's when a private company will decide to become public.
Over time, as companies grow, they require more money to expand markets; develop, produce, and sell new products, hire more employees, and add to their capital structures with new buildings. This expansion usually requires new investments, so the company "goes public."
Going public involves a complicated process of offering stock for sale to the general public, thus creating a public company. You may have heard the term "IPO." That is short for an initial public offering of stock. The IPO process can take many years and much money. The process can also take the focus of the board of directors and executives away from running the business.