What is a private company?
A private company is a business held under private ownership. Private companies can issue shares and have shareholders, but their shares are not traded on public markets and are not issued through an initial public offering (IPO). As a result, private companies do not need to meet the Securities and Exchange Commission’s (SEC) stringent filing requirements for public companies. In general, the shares of these companies are less liquid and their valuations are more difficult to determine.
Key points to remember
- A private company is a private company.
- Private companies can issue shares and have shareholders, but their shares are not traded on public stock exchanges and are not issued through an IPO.
- The high costs of an IPO are one of the reasons companies choose to stay private.
How a Private Company Works
Private corporations are sometimes referred to as private corporations. There are four main types of private corporations: sole proprietorships, limited liability companies (LLCs), S corporations (S-corps) and C corporations (C-corps), all of which have different rules for shareholders, members and taxation.
All businesses in the United States start as private corporations. Private companies vary in size and scope, encompassing the millions of sole proprietorships in the United States and the dozens of unicorn startups around the world. Even American companies such as Cargill, Koch Industries, Deloitte and PricewaterhouseCoopers, with over $25 billion in annual revenues, fall under the umbrella of private enterprise.
Remaining private, however, can make fundraising more difficult, which is why many large private companies ultimately choose to go public through an IPO. While private companies have access to bank loans and some types of equity financing, public companies can often sell shares or raise funds through bond issues with greater ease.
Types of private companies
Sole proprietorships place ownership of the business in the hands of one person. A sole proprietorship is not its own legal entity; its assets, liabilities and all financial obligations are entirely the responsibility of the individual owner. While this gives the individual complete control over decisions, it also increases risk and makes fundraising more difficult. Partnerships are another type of ownership structure for private companies; they share the unlimited liability aspect of sole proprietorships but include at least two owners.
Limited Liability Companies (LLCs) often have multiple owners who share ownership and liability. This ownership structure merges some of the advantages of partnerships and corporations, including income taxation and limited liability without having to incorporate.
S corporations and C corporations are similar to public corporations with shareholders. However, these types of businesses can remain private and do not need to submit quarterly or annual financial reports. S corporations cannot have more than 100 shareholders and are not taxed on their profits while C corporations can have an unlimited number of shareholders but are subject to double taxation.
Advantages and disadvantages of private companies
The high costs of an IPO are one of the reasons many small businesses stay private. Public companies also require more disclosure and must publish their financial statements and other documents on a regular schedule. These filings include annual reports (10-K), quarterly reports (10-Q), major events (8-K), and proxy statements.
Another reason businesses stay private is to maintain family ownership. Many of today’s largest private companies have been owned by the same families for several generations, such as the aforementioned Koch Industries, which has remained in the Koch family since its founding in 1940. Staying private means a company doesn’t have to respond to its public shareholders or choose different members for the board of directors. Some family businesses have gone public, and many retain family ownership and control through a dual-class share structure, which means family shares can have more voting power.
IPO is a final step for private companies. An IPO costs money and takes time to set up the business. Fees associated with the IPO include SEC filing fees, Financial Industry Regulatory Authority (FINRA) filing fees, stock exchange listing fees, and amounts paid to underwriters of the offer.