Closely Held Public Company: Everything You Need to Know
A closely held public company is a corporation whose stocks are sold to the general public but whose shares are owned by small group of people.3 min read
A closely held public company is a corporation whose stocks are sold to the general public but whose shares are owned by small group of people. Forming this type of corporation may not be possible, as there is no way to ensure who purchases the shares of a public company.
What is a Publicly Held Corporation?
Publicly held corporations are companies that sell their shares on stock markets such as the New York Stock Exchange. When shares of a company are listed publicly, they can be purchased by anyone. The market value of a public company will be determined by its stock. For instance, if the company's stock is in high demand, then the price of its shares will increase. Naturally, this will cause the market value of the company to increase.
Disclosing financial records is one of the biggest requirements of a publicly held corporation. This must occur on a quarterly basis, and the disclosure should include the company's revenue and profits. Each quarter, analysts will project the expected performance of the company. When the company doesn't meet this financial estimate, its stock prices will go down. Likewise, when a company outperforms the estimate, its stock prices will go up.
When a person buys stock in a publicly held corporation, they become a company shareholder. One of the biggest difficulties in operating a public company is the need to balance the interests of different groups, including:
- Company employees.
Obviously, this can easily result in conflicts. For instance, imagine there is a public company that simply isn't able to make a profit, and this struggle continues year after year. In order to protect their investment, shareholders of the company may demand that expenses be cut, including employee wages and benefits. This could result in poor service and unhappy customers.
While closely held corporations have shareholders as well, they are usually made up of the company's founders and investors, meaning they may have different expectations than the shareholders of a public company.
What Are Closely Held Corporations?
Closely held corporations are one of the most common types of corporation in the world. Although these corporations are not necessarily better than publicly held companies, they do have their certain advantages. Every corporation starts its life as a closely held corporation. Later, the corporation can transition to a publicly held corporation.
With a closely held corporation, a limited number of shareholders will be responsible for controlling the company's management and operations. Many family businesses are closely held corporations, although this isn't a requirement for this corporate structure.
Another big difference between publicly held companies and closely held corporations is that the closely held corporations do not have to follow the same reporting requirements.
These two types of corporations also have very different shareholder groups. As mentioned, in a closely held corporation, there will be a small group of shareholders. This group is usually comprised by the people who founded the corporation. On the other hand, publicly held corporations have extremely large groups of shareholders, as company stock is sold to the general public.
The value of a publicly held corporation is simple to calculate. Buying and selling shares of these companies is also very easy. With private closely held corporations, selling stock can be extremely difficult. Typically, shareholders in a closely held corporation will only sell their stock if they plan to leave the company, and these stocks will almost always be sold to the other owners.
Problems with Valuation
A big issue with closely held corporations is accurately determining their value. The reason valuation is more difficult with closely held corporations has to do with the limited number of shareholders. Because the shares aren't sold on the open market, it's very hard to determine the actual value of each share.
The IRS, however, has provided some guidelines that can help with the valuation of a closely held corporation. The basic rule is that you can estimate the value of a share by considering what price would be charged during a transaction between a willing seller and buyer. Generally, both courts and appraisers have accepted these rules for valuing a closely held corporation.
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