Define Private Corporation: Everything You Need to Know
To define private corporation, you need to understand the difference between private and public companies.3 min read
To define private corporation, you need to understand the difference between private and public companies. With a public company, stocks are sold to the general public on a stock exchange. Private companies do not publicly sell their stock, and they must acquire funding from other resources.
What is a Private Corporation?
When starting a corporation, you will need to decide if your company will be publicly or privately traded. The benefit of a public company is that your stock will get traded on a major stock exchange such as the NASDAQ or New York Stock Exchange. If you found a private company, your shares will be privately issued and traded among a group of investors.
Private companies are not able to offer their stock publicly. Only company owners and directors may make deposits in a private company. Another way to think of a private corporation is a company owned by individuals instead of the government. The government can create public corporations to fulfill a social need. Private corporations are formed for the benefit of their owners.
As with publicly held companies, shareholders of a private company can receive both dividends and profits from the company. That said, there are some big differences between a private and public company shareholder. For instance, private company shares take much more effort to buy and sell than shares in a public company.
This means that it can be very difficult for an owner to cash out their shares when they want to leave the company. Unlike public shares, whose prices depend on the market in which they're sold, determining the value of a private company share often requires a negotiation between the person selling the shares and the person buying them.
Private company valuation is extremely difficult, especially as shares of these companies are infrequently traded. Although it is possible, determining the worth of a privately held company takes much more work than it does for a public company. On the other hand, privately held companies are not bound by the Securities and Exchange Commission (SEC) filing requirements that apply to public companies.
While a lack of filing requirements make privately held companies easier to run, it also means that they are less financially transparent. Shareholders may accept this lack of transparency, however, as private companies are not subject to as many government regulations.
Privately held companies have the option of going public, but many decide to maintain their private status. One of the main reasons to keep a company private is having more flexible management options. Public companies must obtain input from a large group of shareholders when making major decisions.
However, the operational freedom of private companies does have certain drawbacks. For instance, because privately held companies are not subject to as much oversight as public companies, they may take big risks that can potentially damage the company.
Benefits of Private Corporations
A private corporation is a legal entity unto itself. As a result, the owners of a private company are not liable for the company's actions or debts. On the other hand, this also means that corporations are subject to double taxation, which is a distinct drawback.
A corporation has the ability to transact business using its own name and can perform other actions as long as they are legal. While a representative will need to exercise the corporation's rights, the corporation is the entity that is responsible for any actions that actually take place.
Minimal regulation is another benefit of private corporations. Public companies must comply with the rules of multiple federal authorities, including the SEC.
Other major advantages of private corporations include:
- Less formation and administration costs than public companies because of the lack of regulations and government filing requirements.
- No need to receive input from the public when managing the company.
- The ability to protect the interests of the original founders by limiting company shareholders.
- Controlling who has company voting power.
You should also consider the drawbacks of private corporations. For instance, while offering stock on a limited basis does allow the original founders to maintain control of the company, it also restricts the companies' financing. Selling stock is one of the easiest ways for a company to raise money for expansion or other business projects.
If they want, private companies can raise capital by selling stock, but the amount they can raise will be much less than with public companies, and selling this stock can also complicate company management if the new shareholders have different objectives than the original shareholders.
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