Private Company - Explained
What is a Private Company?
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Table of ContentsWhat is a Private Company?What are the Characteristics of a Private Company?Types of Private Companies Reasons for Remaining Private Key differences between Public Company and Private Company Academic Research on Private Company
What is a Private Company?
A private company is a privately-owned business whose stocks are not traded on the public exchange and are not issued through an initial public offering. The shares of a private company are offered, owned and traded privately or over the counter. As the stocks of a private company are not listed on a public exchange, these companies do not need to comply with the filing requirements of the Securities and Exchange Commission (SEC).
These businesses are usually less liquid, and It is often more difficult to estimate the valuation of such companies. A private company may also refer to the companies which are not owned and controlled by the government. However, in most of the native English-speaking countries including the United States and the United Kingdom the former meaning is much more prevalent in the current economic situation.
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What are the Characteristics of a Private Company?
Private companies are also known as Privately held company, close corporation, closely-held corporation or unlisted corporation. Depending on its ownership there can be four types of private company- sole proprietorships, limited liability corporations, S corporations, and C corporations.
The rule for shareholders, members and taxations are different for each type. The scope and size of the private companies can be of a vast range. Many of the private companies are owned and operated by the company's founders, their families and a small group of investors. The shares of these companies are held by the founders, their friends, families, angel investors, and employees.
Millions of individually owned businesses in the U.S. are private companies. Private companies are not necessarily small business. Some world-famous companies of the U.S including Deloitte, PricewaterhouseCoopers, Ikea, and Dell are private companies. In the United States, all the companies start as a private company and eventually they go public to raise funds.
Raising money often becomes an issue for the privately held companies so after a point many big private companies start offering shares in public through IPO. Private companies are however entitled to receive bank loan and certain types of equity funds.
Types of Private Companies
Private companies owned by one single individual is known as Sole proprietorships. The owner controls the entire company and its operations. The individual owner is responsible for all its assets, liabilities and financial obligations. A higher degree of risks is attached to these companies and as a result, the fundraising becomes difficult. Another ownership structure of a private company is the partnership business.
Partnership companies are owned by two or more individuals. The liability aspect is similar to the proprietorship business. Limited Liability companies are owned by multiple owners and the ownership and liability is shared among them. The owners of limited liability companies are not personally liable for the company's financial obligations or liabilities.
Limited Liability companies have the characteristics of both corporations and partnership companies. The feature of limited Liability is similar to the corporations, at the same time the limited liability companies enjoys the flow-through income taxation which is a feature of the partnership company.
S Corporation and C corporations are owned by its shareholders, but they are allowed to remain private. They do not trade their shares on public exchanges, thus are not required to submit annual financial reports. S corporations are not allowed to have more than 100 shareholders and are taxed as a partnership business. The income can be passed directly to the shareholders for avoiding double taxation. The C corporations can have any number of shareholders, but they are subject to double taxation.
Reasons for Remaining Private
Many family-owned privately held companies prefer to stay private to maintain family control. Some of the largest private companies in the U.S. are owned by a family for generation and they are not ready to go public and lose control. They do not want to involve other people in the decision-making process of the company. Sometimes the family-owned businesses go public but maintain the family control by issuing dual-class share.
Many small companies remain private to avoid the costly process of Initial Public Offering. Once gone public, the companies also need to fulfill the SEC requirements including periodical public disclosure of financial statement. The process of going public involves money and time. A company needs to pay SEC registration fee, Financial Industry Regulatory Authority fee and a stock exchange listing fee. They also need to pay the underwriters of the offering.
Many private companies take time to be prepared for going public in a later stage. Companies also stay private to avoid disclosing their financial details to their competitors. In the initial stage, it may matter a lot for small companies. They may not want their competitors to know every detail about their company's margin, pricing, profitability, and financial structure before they get a strong hold on the market.
Key differences between Public Company and Private Company
As already discussed, private companies do not have to adhere to the SEC regulations and filing requirements while public companies need to follow those rules. The performance of public companies is always under the scrutiny of the public. The general public and the press have access to their financial reports.
The general public and the press have access to their financial reports. Anyone who holds the stocks of the company is allowed to attend the annual meetings of a public company whereas the private company's annual meetings are much more private. They do not have to reveal their performance in public. The decision-making process is easier and fast in private companies.
The value of each share of a public company is known to all. It is much easier to trade the stocks of public companies. The assets of a private company are much more illiquid. It is often difficult to sell the shares of a private company. Determining the valuation of a private company is also difficult as the information is not available in public.
A Public company may also decide to go private. In this situation, a company acquires all the outstanding stocks. It generally involves the cash-out of all or almost all of the company's public shares. They withdraw their shares from the public exchange and deregister from the SEC.
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