1. Common Stock
2. Fundraising
3. Reporting Requirements
4. Corporate Control
5. Management Structure
6. Closely-Held Stock

Are all corporations public? The answer is no; some corporations are traded only privately and not on the stock market. Many public companies start as private businesses, some even as sole proprietorships. Partnerships and corporations can also be privately held, although private corporations are very different than publicly traded corporations. Small business owners should explore the opportunities and challenges of each entity.

Common Stock

A corporation goes public when it issues an initial public offering (IPO) of stock shares. The company must first register these shares with the Securities and Exchange Commission (SEC) and submit a prospectus with required disclosures about the business and the stock shares. After this is submitted, the corporation's shares can be traded on any exchange for which it meets the requirements.

In contrast, private corporation stock can't be traded on public exchanges. Instead, it is sold to individual and institutional investors as governed by SEC Regulation D.

Fundraising

It's easier for public corporations to raise money because they can sell both preferred and common stock shares. For additional funding, more common shares can be released in a secondary offering. Unlimited preferred series of shares can be issued. Private corporations, however, must rely on funds from private investors, profits, and venture capitalists. Private shares must be held for at least six months before resale according to SEC Rule 144.

Reporting Requirements

Public corporations are required by stock exchange and SEC regulations to make extensive financial and operation public disclosures every year. These must include:

  • Balance sheet.
  • Cash flow statement.
  • Income statement.

Earnings must be disclosed on a quarterly basis.

Private corporations are not subject to reporting requirements but must make disclosures to potential investors through a prospectus when selling shares privately.

Corporate Control

When common stock is issued through an IPO, the company may gain thousands of additional shareholders, each of whom can vote on important business issues. However, this control is minimal because it is typically distributed among many investors. Private corporations, on the other hand, have fewer shareholders who thus have more control over the day to day operations of the business. This may result in a single owner pressuring the board of directors to follow his or her advice. This can also happen with public corporations if a large stock percentage is purchased by just one investor. Many corporations offer no more than 50 percent of their equity to avoid takeovers of this kind.

Management Structure

Corporations are organized to separate the ownership of a company from its control. This means that investors do not need to provide management and administration and entrepreneurs do not need to provide capital.

This contrasts with general partnerships and sole proprietorships, in which the business' owners are also responsible for its administration and its debts. If an owner quits, the business is typically dissolved.

Corporations exist as a separate legal entity from its owners, called shareholders. The shareholders do not run the business but instead elect directors to do so on their behalf. Those who hold majority shares can vote for the directors, and the shareholders can remove directors at any time for any reason with a majority vote. This means that majority shareholders have control over the company's administration.

Closely-Held Stock

In many public corporations, shareholders are not directly involved in business operations. They receive dividends but do not take any risk other than financial. The larger the corporation and the more shareholders, the less likely that a majority may be able to abuse their power against minority shareholders.

However, most U.S. corporations are not large but closely-held. This structure is not as regulated and allows a shift in dynamics and interaction between owners and managers. The main differences between large and small corporations are as follows:

  • Many closely-held corporations must manage themselves as they cannot afford professional management services. Owners are much more likely to serve as managers here than in larger corporations; this creates many conflicts of interest. Some stockholders double as officers while others have a disproportionate amount of control because of the size of their ownership share. Profits may be distributed as wages and/or dividends.
  • Large public corporations rarely have a single shareholder or group of shareholders in majority control, while this situation is common for closely-held corporations.
  • The stock of closely-held corporations does not trade on the public market no matter how valuable it is. For this reason, investors do not typically invest in small corporations since they are unable to monetize their shares.

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