Updated November 19, 2020:

Private company stock is issued by a business that is privately owned. Private companies, sometimes called privately held companies, can have shareholders and issue stock. However, those shares don't appear on public exchanges. With private company stock, there is no initial public offering (IPO), and private organizations don't have to follow the filing requirements of the Securities and Exchange Commission (SEC). On the downside, private company stock is more difficult to place a value on, and it's not as easy to liquidate.

Types of Private Companies

In the United States, all companies start out as privately held. Large and small, millions of these organizations exist within the American economy and around the world. Even corporate giants like Deloitte, Cargill, Koch, and PricewaterhouseCoopers, who generate billions of dollars in annual revenue, operate as private companies.

The main types of private companies in the United States are sole proprietorships, partnerships, limited liability corporations, S corporations, and C corporations.

  • Sole proprietorships are owned by one person and have no legal identity separate from the owner. That individual is responsible personally for all assets, liabilities, and financial obligations of the company. While this is good for owners who want to be in control of all aspects of the business, this structure carries more risk and more challenges in raising capital.
  • Partnerships are similar to sole proprietorships, but they involve two or more owners.
  • Limited liability corporations (LLCs) have multiple owners who share the liability, profits, and other ownership facets of the business. This type of company enjoys some of the benefits of corporations in terms of taxes and limited liability, but they don't have to go through the process of incorporating.
  • S and C corporations are like public companies in that they do have shareholders. However, they can maintain their private status and avoid the quarterly and annual reporting requirements of a public entity, with some limitations.
    • An S corporation is limited to 100 shareholders, and profits are not taxed.
    • A C corporation can have unlimited shareholders, but they are double-taxed by the Internal Revenue Service (IRS).

Stay Private or Go Public?

As a business grows, it needs more avenues to raise capital than just borrowing from the bank or equity funding. That leads many larger organizations to go public through an IPO so they can sell shares or use bond funding more easily.

However, an IPO is expensive, and it takes time to work through. Going public requires paying:

  • Registration fees to the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA)
  • Stock exchange listing fees
  • Payments to underwriters

Public companies also have more regulations, filing requirements, and rules pertaining to their financial statements. These include the filing of annual and quarterly reports, major events reporting, and proxy statements. Private companies don't have to report to public shareholders or name members to a board of directors. These factors drive some companies to stay private.

Another consideration is whether the company in question is a family business. Many companies, like Koch Industries, stay private to keep the operation under family control. Koch has operated in this manner since 1940 and has been family-operated for generations. Other family businesses choose to go public and keep control by offering two classes of shares with family-owned shares having more voting rights.

Complexities of Company Stock

For years, stock in public companies was issued via a certificate of ownership. Decades ago, that system was replaced by the Direct Registration System (DRS). This method of operation, as described by the SEC, “allows you to have your security registered in your name on the books of the issuer without the need for a physical certificate to serve as evidence of your ownership.” In a nutshell, the DRS keep track of who owns what stock. It is updated by the company issuing the stock or its agent. Everything is handled by computers for speed and accuracy.

Private companies have a similar system governed by various state laws. In Delaware, home of more corporations than any other state, the shares are "uncertificated" as described in Section 158 of the Delaware Code on Stock Certificates; Uncertificated Shares: "The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any […] of its stock shall be uncertificated shares."

The corporate board resolves that going forward, all shares are uncertificated. Any previously issued shares are handed back to the company, which issues uncertificated shares instead.

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