Key Takeaways:

  • Ownership Structure: Private companies are owned by a limited number of shareholders, while public companies are owned by the public through traded shares.
  • Regulatory Requirements: Public companies face stricter regulations, including mandatory disclosures to the SEC, while private companies operate with fewer reporting obligations.
  • Funding Opportunities: Public companies can raise capital through stock markets, whereas private companies rely on private investments or venture capital.
  • Control and Flexibility: Private companies maintain more control and privacy, while public companies have to consider shareholder interests and regulatory compliance.

There is a difference between public and private corporations. A private corporation is defined as a smaller corporation where there is a limited number of shareholders that stock gets issued to, and the stock isn't offered to the public. On the other hand, a public corporation has been authorized to sell their stock to the public.

What Is a Private Corporation?

In a private corporation, the stocks are only held internally and won't be publicly traded. The founders, group of investors, or management are usually the owners. The shareholders are often very involved in the business and act as the directors and officers of the company.

Sometimes there are bigger corporations that have a larger number of shareholders who wish to stay private for multiple reasons. These reasons can include having more privacy and avoiding the expensive cost of going public and managing the requirements for a public company.

It's falsely thought that companies that are privately held are of little interest and small. However, many big companies are privately held, such as Dell, Koch Industries, Mars, Bloomberg, and Cargill.

Advantages and Disadvantages of Private Corporations

Private corporations have unique advantages that appeal to business owners and stakeholders:

Advantages:

  • Privacy: Private companies are not required to disclose financial or operational details to the public.
  • Control: Founders and initial investors retain decision-making authority without outside interference.
  • Cost Savings: Private corporations avoid the high costs associated with IPOs and ongoing public reporting obligations.

Disadvantages:

  • Limited Funding: These companies cannot access public capital markets, making funding options like venture capital or private equity essential.
  • Valuation Challenges: Without public trading, it can be difficult to determine the company's market value.

What Is a Public Corporation?

In a public corporation, the shares are traded through a stock exchange on the open market. The companies that have a large amount of revenue and a bigger number of shareholders are often able to afford what it costs to go public and be in compliance with the multiple regulations that are imposed on companies that are public by securities laws and other types of governmental regulations.

Why Companies Go Public

Businesses decide to go public for several strategic reasons:

  • Access to Capital: The ability to raise substantial funding through the sale of shares to the public.
  • Enhanced Visibility: Public companies gain more media and market attention, often resulting in a stronger brand presence.
  • Liquidity for Shareholders: Shareholders, including early investors, can sell their shares on the stock exchange.
  • Increased Credibility: Being publicly traded enhances trust and credibility with partners and clients.

However, the process of going public requires companies to comply with extensive regulations and face scrutiny from analysts and investors.

Difference Between Public and Private Corporation

Both public and private companies must have:

  • An annual meeting
  • A board of directors
  • A record of meetings
  • A shareholder list in addition to their holdings

However, there are some major differences in how a private company and a public company operate.

Key Considerations for Choosing Between Private and Public Structures

When deciding between a private or public corporation structure, consider the following factors:

  1. Business Goals:
    • For businesses prioritizing control and privacy, a private structure is more suitable.
    • Public structures are ideal for companies aiming to scale rapidly with extensive funding needs.
  2. Regulatory Environment:
    • Public companies are subject to stringent regulatory standards, including SEC filings.
    • Private companies have minimal reporting requirements, reducing administrative burdens.
  3. Growth Plans:
    • Public companies can attract large-scale investments.
    • Private companies may need to rely on strategic partnerships or reinvest profits for growth.

Common Stock

A public company is one that has sold a portion or all of itself to the public through an initial public offering (IPO). This means the shareholders have a claim to a portion of the company's profits and assets. Before shares are sold through an IPO, the corporation should register them with the U.S. Securities and Exchange Commission (SEC). They need to also prepare a prospectus that has all important information disclosed about the company and all the shares they're offering.

Once this is issued, the public corporation stock can be traded on the stock exchange, assuming the company meets all mandatory listing requirements for the exchange. A private corporation's stock is not allowed to be freely traded to the public. A private corporation needs to rely on any exemptions to the requirements for SEC registration to place shares with wealthy individuals and institutional investors privately. All private offerings are controlled by the SEC's Regulation D.

Raising Funds

Public companies have an advantage of getting into the financial market by sell bonds (debt) or stock (equity) to increase capital, such as cash, for projects and expansion. Once the company gets listed, investors can move in and out of stock by selling and shares trades on the stock exchange. If more funding is required for a public corporation, it can give out extra common shares via a secondary offering. The public corporation can decide to register and issue a variety of stock if they want as well.

A large number of people share equity investment when it's a public company, as it consists of many shareholders instead of only a few. The corporation's debts need to be paid, but it's not necessary to pay shareholders if bankruptcy occurs. A primary advantage companies that are private is not having to answer to any stockholders and not needing to file a disclosure statement with the SEC. A private company cannot go into public capital markets, which means they need to turn to private funding instead.

Private companies often try to decrease the tax bite, while companies that are public look to increase their shareholders' profits. Private companies are dependent on private investments and profits for expansion and operations. Equity financiers and venture capitalists put cash into private corporations when they purchase private shares.

Frequently Asked Questions

  1. What are the main differences between private and public companies?
    Private companies are privately owned with restricted stock distribution, while public companies trade shares openly in stock markets and adhere to stricter regulations.
  2. Why do businesses remain private?
    Many businesses remain private to maintain control, reduce costs, and avoid public scrutiny.
  3. What is the role of the SEC in public companies?
    The SEC oversees public companies to ensure transparency and protect investors by enforcing compliance with disclosure and financial regulations.
  4. Can a private company become public?
    Yes, through an initial public offering (IPO), a private company can transition to a public structure.
  5. What are examples of successful private companies?
    Examples include Koch Industries, Cargill, and Mars, which operate successfully while remaining private.

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