Private Corporation Definition: Everything You Need to Know
The private corporation definition is a type of corporation in which stock shares are only offered to specific individuals such as employees or investors. 3 min read
2. General Corporate Characteristics
3. Corporate Taxation
4. Benefits of a Private Company
5. Disadvantages of a Private Company
The private corporation definition is a type of corporation in which stock shares are only offered to specific individuals such as employees or investors. While private corporations are quite similar to public corporations, they do have unique benefits and drawbacks. Understanding this business entity can help you determine if it's the right choice for your company.
Private Corporation Overview
Like a public corporation, a private corporation issues stock and has shareholders. However, it does not issue an initial public offering (IPO) and shares are not traded on public exchanges. Instead, the private corporation is held only by a small investor group and is organized for the profit of these individuals.
Private corporations must satisfy the same legal requirements as public corporations. Four main types of private companies include:
- Sole proprietorships, in which the company is owned by just one person
- Limited liability companies (LLCs), which can have one or more owners known as members
- S corporations
- C corporations
Each has to follow specific guidelines about members, shareholders, and finances and taxes.
All companies in the U.S. are initially privately held. They range in scope and size from small family businesses to large corporations such as Koch Industries. However, most large corporations eventually decide to go public so it's easier to raise working capital. Private companies must rely on certain types of equity funding and bank loans but are not subject to proxy wars and hostile takeovers that may affect public corporations. They tend to be more stable because their share prices do not vary with the investment market.
In many cases, private company stock is held only by the company's owners, their family members, and employees and their family members. Outside investors may be limited to those who meet certain requirements, such as an income level. The number of stock shares available and the price and value of each share is only known to owners and does not need to be filed with the Securities and Exchange Commission (SEC).
General Corporate Characteristics
Corporations are considered separate legal entities from their owners. This allows owners to protect their personal assets from business debts and obligations, a concept known as limited liability. Corporations can engage in business and legal actions just as an individual would, under the guidance of a company representative. However, this person is not liable for actions taken on behalf of the business provided they are legal.
Private corporations are formed by filing articles of incorporation and obtaining licenses and permits from the relevant state government agencies. Fees for these filings vary by state. In addition, the owners of the corporation must create bylaws, appoint a board of directors and hold regular meetings, and offer initial stock to shareholders.
Private and public corporations are taxed in the same way. Profits are subject to the corporate tax rate, which is as low as 15 percent. Profits can be retained within the corporation or distributed to shareholders as dividends, with a limit of $250,000 of retained profits. Dividends are taxed when distributed as income to the shareholder.
Benefits of a Private Company
Publicly traded companies must adhere to extensive regulations and reporting requirements from the SEC. For this reason, keeping a company private can reduce legal and administrative expenses.
In public corporations, management control can be reduced by the public sale of shares to the extent that the founders no longer have input in the direction of the business. This is avoided in private companies since shares are only offered to those who share the founders' vision.
Like public company stockholders, those who own shares in a private corporation have the power to elect board members and appoint executive managers. However, voting power is more tightly controlled since shares are only available to specific individuals.
Disadvantages of a Private Company
Private companies are unable to access the rapid increase in capital that occurs when public stock shares are offered. This is a valuable tool that public corporations can use as working capital as they grow. While private companies can receive funds from investors, this is typically well below the level generated by an IPO.
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