Private Entity: Everything You Need to Know
A private entity can be a partnership, corporation, individual, nonprofit organization, company, or any other organized group that is not government-affiliated.3 min read
A private entity can be a partnership, corporation, individual, nonprofit organization, company, or any other organized group that is not government-affiliated. Indian tribes and foreign public entities are not considered private entities.
Unlike publicly traded companies, private companies do not have public stock offerings on Nasdaq, American Stock Exchange, or the New York Stock Exchange. Instead, they offer shares privately to interested investors, who may trade among themselves.
Private Company vs. Private Entity
- The Companies Act of 2013 governs the registration of private companies.
- This type of company is formed by following the steps laid out by this law.
- Private entities are determined not by this law but by ownership and holding. For example, sole proprietorships and partnerships are designed as private entities.
- A private entity is not necessarily a private company, but all private companies are private entities.
How Private Entities Work
Although private companies can be of any size, they often include a small group of chosen investors who may include employees, colleagues, friends and family, and other interested parties. If this type of company needs funding to grow, it may seek it from venture capital firms or from large institutional investors. Some private companies eventually decide to go public with an initial public offering (IPO) of stock shares on a public exchange. Sometimes, public companies go private when a large investor buys a bulk of the outstanding stock shares and plans to remove them from public exchanges.
Importance of Private Entities
Both shareholders of public and private companies receive dividends and profits, but major differences exist in how these are received and valued. Because private shares are not liquid, finding buyers and sellers can be challenging. This means that if a shareholder wants to sell his or her shares, no set price exists and he or she must negotiate with potential buyers. Because shares aren't traded often, determining their worth can be difficult.
Private companies do not need to report trades to the SEC like public companies do. This means a privately owned company is not as transparent and is subject to fewer government regulations than a publicly traded company. However, this also means private companies may carry greater risk than public companies.
How FOIA Affects Private Entities
The Freedom of Information Act (FOIA) is a federal law that requires certain agencies to provide certain types of records to any person who asks. Major government bodies such as federal courts and Congress are exempt from FOIA. Some state agencies are also exempt depending on state laws governing public records. In general, FOIA applies to:
- Federal, state, and local government agencies, such as the Federal Communications Commission.
- Certain state legislatures depending on the laws in those states.
- Most private entities are not bound by federal FOIA laws. However, these laws may apply to private entities involved in government business. This situation occurred in Colorado in 2000, when a nonprofit corporation was required by the state's Court of Appeals to share documents related to a project it was working on with the city of Denver.
- If a government entity has control of private records, these may also be subject to FOIA.
- Most states follow federal FOIA rules but also use a functional equivalent test to determine whether a private entity should have to disclose records. If they find that the entity receives substantial financial support from the government or conducts tasks normally done by a government agency, they may have to disclose their records. This happened to a private company in Florida that was tasked by the West Volusia Hospital Authority to operate local hospitals that were previously managed by the state. The Florida Supreme Court found the company was subject to FOIA. That's because the company received government benefits, including the use of tax money and eminent domain and thus were found to be acting on behalf of the government.
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