What is the Difference Between a Private and a Public Company?
The differences between a private and public company start with its ownership structure and spans into a handful of key areas in how each is run. Whether a business runs as a publicly traded company or a privately held company doesn’t affect its profitability, but does require it to adhere to certain regulations. Here are the main differences between a private and a public company:
A privately held company is owned by a select group of people, or an individual. This can be a founder (or founders), management, a syndicate, or any other group. A publicly traded company can be owned by members of the public, who purchase shares on an open stock exchange.
Shares are available for anyone who has the money to buy, and can be sold or traded at the owner’s discretion. Shares are commonly used as investments, as their value changes with the value of the company, and shareholders are paid a dividend from the profits the company makes.
Shareholders all have a say in the way a public company is run. The degree of ownership a shareholder has in a public company is determined by the proportion of the company’s shares they hold.
Businesses often seek new investment to help them to grow, whether that be to expand their operations, or to make purchases. However, the way in which a company raises capital can depend on whether it is public or private. Both public and private companies can approach banks for loans, but there are differences when it comes to seeking outside investment.
A public company has the advantage of being able to go to the stock market to raise funds. It can issue new shares or sell bonds, both of which can be purchased in exchange for a proportion of the company’s ownership. Bonds are commonly sold through an investment bank, on behalf of the company.
A private company cannot go to the public market to raise funds, though there are some exceptions. Generally speaking, a privately held company must rely on private investment to raise additional capital. This investment cannot be traded as easily as shares, but gives the investor an ownership stake in the business in the same way that shares do for public companies. Private companies can sell a limited number of shares under some circumstances.
A common way for private companies to raise funds is to become a public company.
As private companies grow, they often have more need for funds to aid their expansion. Companies can take out a bank loan, which incurs debt, but owners can also decide to make the company a public one. When this happens, the company sells all, or part, of its ownership as shares on the stock market.
“Going public” is often a long and expensive process, and is done through an investment bank. The company will register on the stock market, and decide on the amount and value of its shares. This is called an Initial Public Offering, or IPO. It will commonly set aside shares for its current owners, allowing them to keep control of the business by owning a majority of the shares. These shares can either be purchased or gifted.
While going public is a good way for a company to raise funds, it does come with the obligation to report to its shareholders.
Reporting and disclosure
Public disclosure is one of the disadvantages of being a publicly traded company. Public companies must share financial information with shareholders and the general public. They are required to file quarterly reports, an annual report, and several other disclosure documents about the businesses performance and financial position. Each country has an authority with which these reports must be filed; in the U.S. that is the Securities and Exchange Commission (SEC).
This disclosure is important information for both current and prospective shareholders. It enables shareholders to make decisions and see the return they are earning on their investments. This is the key way a public company is answerable to its shareholders.
Private companies generally do not have to share their financial information with anyone, though large companies may do. In the U.S., companies with more than US$10 million in assets and 500 shareholders are regulated by the SEC, and do have reporting requirements. Being free of reporting obligations is a significant advantage of being a privately owned company.
The reporting requirements of publicly traded companies mean they are considered much easier to value than private companies are. Much of their financial information is readily available, allowing anyone to accurately calculate how much the company is worth.
Valuing private companies is almost impossible without access to their financial records, which they do not have to share.
The size of the company has little bearing on whether it is public or private. While public companies are generally larger, this is not always the case. Giant multinationals Mars, Deloitte and PricewaterhouseCoopers are all privately owned companies.
In the same way a private company can go public, a public company can also transform itself into a private company. However, this is less common. It usually involves a private equity firm purchasing a large portion of shares so as to take a controlling stake in the company.
The main reason a public company decides to become public is to restrict the number of investors, or owners, it has. The decision to go private has to be agreed upon by the majority of shareholders.