Key Takeaways

  • A private corporation does not trade shares publicly and is often owned by a small group of investors.
  • Private corporations avoid public reporting requirements and shareholder pressure but have limited access to public capital.
  • Types of private companies include LLCs, S corporations, and C corporations.
  • Private corporations have flexibility in decision-making and are protected from hostile takeovers.
  • Disadvantages include less liquidity and difficulty raising large-scale funding compared to public companies.
  • Exit strategies like acquisition or IPO are primary paths to liquidity for private corporation owners.
  • Private companies must still comply with accounting and governance standards but have fewer disclosure rules.

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).

How Private Corporations Raise Capital

Private corporations must find alternative ways to raise capital since they cannot issue shares to the public market. Common funding sources include:

  • Venture capital: Investment from firms or individuals in exchange for equity.
  • Private equity: Later-stage investments aimed at growing or restructuring the company.
  • Angel investors: Early-stage funding from high-net-worth individuals.
  • Debt financing: Bank loans or private loans secured against company assets.
    Because private corporations don’t publicly disclose financial data, investors usually require detailed private disclosures during due diligence.

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.

Compliance and Reporting Requirements

Although private corporations avoid SEC reporting requirements, they still face compliance obligations. These include:

  • Filing annual reports and maintaining corporate records in the state of incorporation.
  • Following applicable tax filings and employment laws.
  • Adhering to internal corporate governance structures, such as maintaining a board of directors and recording meeting minutes.
    Private companies may also need to provide financial statements to lenders or investors, even if not publicly disclosed.

Corporate Taxation

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.

Financial Reporting Standards for Private Corporations

Private corporations can follow different accounting standards than public corporations. In the U.S., many adopt Generally Accepted Accounting Principles (GAAP), while smaller businesses might use a simplified reporting framework like FRF for SMEs (Financial Reporting Framework for Small- and Medium-Sized Entities).Key differences from public companies include:

  • No mandatory quarterly reporting.
  • No requirement for external auditor certification unless requested by lenders or investors.
  • Flexibility to disclose only to private stakeholders.

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.

Exit Strategies for Private Corporations

Owners of a private corporation may plan an eventual exit to unlock value from their shares. Common exit strategies include:

  • Acquisition: Selling the company to a larger corporation or private equity firm.
  • Initial Public Offering (IPO): Transitioning from private to public to access capital markets.
  • Management buyout: When the management team purchases ownership from shareholders.
    Choosing an exit path depends on business goals, market conditions, and investor expectations.

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.

Challenges Faced by Private Corporations

Beyond limited access to capital, private corporations face other unique challenges:

  • Limited liquidity for shareholders: Selling private shares is more complicated and subject to restrictions.
  • Difficulty attracting top talent with stock options: Public company stock options are generally more liquid and attractive.
  • Potential lack of transparency: Can lead to lower trust from stakeholders compared to public companies.
    Private corporations must balance their confidentiality with maintaining investor and employee confidence.

Frequently Asked Questions

  1. How does a private corporation differ from a public corporation?
    A private corporation doesn’t trade shares publicly and is owned by a small group, while a public corporation offers shares on stock exchanges to the general public.
  2. Can a private corporation raise money from investors?
    Yes, but only from private sources like venture capital, private equity, or accredited investors—without public stock offerings.
  3. Does a private corporation have to disclose its financial statements?
    No public disclosure is required, but private corporations may share financials with lenders, investors, or under contractual obligations.
  4. Can a private corporation eventually go public?
    Yes, through an IPO, a private corporation can convert to a public company to access larger capital markets.
  5. What are the main challenges of running a private corporation?
    Challenges include raising capital, limited liquidity for shareholders, and attracting talent without publicly traded stock options.

If you need help with establishing a private corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.