1. Basics of Publicly Held Corporations
2. Publicly Held vs. Privately Held Corporations

A publicly held corporation is a corporation whose stock is sold to and owned by the public instead of private investors.

Basics of Publicly Held Corporations

Several legal business forms may be created, including corporations. Corporations are created when a specific state grants a corporate charter. Unlike other types of businesses, corporations are legally separate from their owners.

Because corporations are considered to be legal persons, they have the ability to accomplish several tasks:

  • Make contracts.
  • Be a party to an agreement.
  • File a lawsuit against another person or company or be sued themselves.

Corporations have their own privileges and rights that are different from company owners. Corporations also have different liabilities from their owners. You can choose from several different corporate forms. However, almost all corporations are formed for the express purpose of transacting business.

One type of corporation is a publicly held corporation. When a corporation's stock is owned by the public, it is considered a publicly held corporation. Corporate shares of a publicly held corporation will be listed on a public stock exchange such as the NASDAQ.

One of the drawbacks of a publicly held corporation is that the company is vulnerable to the fluctuations of the market. On the other hand, debt can be distributed amongst company shareholders, and these companies typically possess working capital beyond that which would be held by a private corporation.

Investing in publicly held corporations tends to be less risky than investing in closely held corporations. Closely held corporations and publicly held corporations, however, are similar in some regards.

The biggest difference between these two corporate forms is that there are a variety of securities laws that apply to publicly held corporations that closely held corporations may not need to observe. Some of these requirements include:

  • Strict requirements for governing the corporations.
  • Detailed procedures related to acquisitions and mergers.
  • The need to periodically disclose information about the corporation.

Publicly Held vs. Privately Held Corporations

As you may suspect from their names, privately held corporations are owned privately. In most circumstances, this means that the company is privately owned by the people who founded the company, the company's management team, or an investor group.

Publicly held corporations are owned in part or whole by the public. During an initial public offering (IPO), the company will sell shares publicly, and the people who purchase these shares will have an ownership stake in the company. Besides how they are owned, the biggest difference between public and private corporations is their requirements for public disclosure.

In the United States, the Securities and Exchange Commission (SEC) requires that public companies that sell their stock on public exchanges file earnings reports on a quarterly basis. The purpose of filing these reports is to make sure that shareholders have current information on the company's financial standing.

In addition to mandating quarterly earnings reports, the SEC governs corporate stock offerings. For instance, this agency demands that corporations register their stock offerings and that a prospectus is used to describe the offerings. Information about stock offerings must be provided to the public and corporate shareholders.

Privately held companies, on the other hand, do not need to meet any disclosure requirements, meaning reporting the financial status of the company is only done at the corporation's discretion. The biggest advantage that publicly held corporations have over private corporations is that they can easily raise capital by selling bonds or stocks. This allows for the expansion of the company or the ability to take on large projects.

With a privately held corporation, the primary benefit is that the management team does not need stockholder approval before making company decisions. In addition, private corporations do not need to disclose financial information to the SEC. Private companies, however, are not able to raise capital using financial markets. If the company needs to expand, they would need to seek private funding.

These corporations also have different purposes. The goal of a publicly held corporation is to generate shareholder profits, while private companies are focused on lowering the tax burden on owners. A mistake that many people make is assuming that privately held companies are usually small. In reality, a variety of large corporations are privately held, including Bloomberg, Dell, Mars, and Koch Industries.

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