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Private vs public companies, are they the same? Can you buy the shares of private companies? This article is for you if you have ever asked one of these questions. Private companies and public companies are the two main types of companies. While both business models share some characteristics, they differ significantly in management structure, valuation, and day-to-day business practices.
What Is a Private Company?
A private company is a company that a small group of people owns. Its ownership group has the authority to issue stock to private investors, but it is not available to the general public. The stocks of private companies are not traded on a stock exchange.
Types of Private Companies
- 1. Sole proprietorship
A sole proprietorship is a company owned by one person responsible for all liabilities.
- 2. Partnership
A partnership and a sole proprietorship are very similar. However, a partnership is owned and run by two or more people who collaborate, intending to make a profit.
- 3. Limited liability company (LLC)
Limited liability companies allow sole proprietors or partners to own a business while allowing the company to operate as its own legal entity with liabilities being its own.
Why Would a Company Go Private?
Public companies must make their financial statements available to the public and are subject to intense scrutiny from investors, regulators, and the government. Contrarily, private businesses can decide to keep their financial information and business practices confidential, dodging governmental oversight and regulations that apply to publicly traded companies.
Many of the large US businesses are family-owned and have been passed down through the generations. Sometimes companies choose to preserve their family ownership by remaining private. By going public, the business would become accountable to many more shareholders, who could potentially influence the appointment of board members beyond the founding family.
What Is a Public Company?
A public company can sell its registered securities to the general public. A company becomes a public company following an IPO. A publicly traded company is another name for a public company.
Although most of a public corporation’s shares are traded on public markets, this does not indicate that individual shareholders control the company. Instead, shareholders can choose a board of directors, which then hires an executive team to monitor the company’s day-to-day operations.
Why Would a Company Go Public?
A company that goes public can raise more money for its operations than one that stays private. A company can also issue more shares if it needs more money quickly, which makes public companies more liquid than private ones.
Companies that go public frequently receive additional media coverage, which helps in generating new business. And finally, compared to private companies, public companies typically enjoy a lot more respect in the business community.
Differences Between Private vs Public Companies
In private vs public companies, there are 4 main differences you should know:
- In general, private companies are smaller. Most small businesses are private companies with low valuations and few employees. Public companies are typically much more extensive and have much higher valuations.
- Public companies must answer to their shareholders. Large companies traded on the open market are typically owned by many shareholders, with significant stakes typically held by pension funds, mutual funds, and exchange-traded funds (ETFs).
- Private-equity investors are typically more involved. Private companies, which are not publicly traded, get their funding from revenue, venture capital, and private equity firms. Many venture capitalists participate in the companies they invest in. In this sense, their needs must be met like those of public corporation shareholders.
- Public companies are subject to more reporting requirements. According to the Securities Exchange Act of 1934 and subsequent legislation, public companies must periodically issue financial statements that reveal the company’s overall financial condition. This transparency benefits capital market investors but costs the company financially regarding employee hours.