Corporate Finance & Accounting

Private Enterprise

What is a private company?

A private company is a privately owned company. Private companies can issue stock and have shareholders, but their shares are not traded on public exchanges or through an initial public offering (IPO). As a result, private companies do not have to meet the stringent filing requirements of the U.S. Securities and Exchange Commission (SEC) for public companies. Generally speaking, stocks in these businesses are less liquid and valuations are more difficult to determine.

key takeaways

  • A private company is a privately owned company.
  • Private companies can issue stock and have shareholders, but their shares are not traded on public exchanges and are not issued through an IPO.
  • The high cost of an IPO is one reason why companies choose to stay private.

How Private Companies Work

Private companies are sometimes referred to as privately held companies. There are four main types of private corporations: sole proprietorships, limited liability companies (LLCs), S corporations (S-corps), and C corporations (C-corps), which all have different rules for shareholders, members, and taxes.

All companies in the United States start as privately held companies. Private companies vary in size and scope, including millions of sole proprietors in the U.S. and dozens of unicorn startups around the world. Even U.S. companies with more than $25 billion in annual revenue, such as Cargill, Koch Industries, Deloitte and PricewaterhouseCoopers, fall into the category of private companies.

However, remaining a private company can make financing more difficult, which is why many large private companies ultimately choose to go public through an IPO. While private companies do get bank loans and some types of equity financing, public companies can often more easily sell stock or raise money by issuing bonds.

Type of private company

A sole proprietorship places ownership of the company in the hands of one person. A sole proprietorship is not its own legal entity; its assets, liabilities and all financial obligations are solely borne by the individual owners. While this gives individuals complete control over decisions, it also increases risk and makes it more difficult to raise capital. Partnerships are another ownership structure for private companies; they share the unlimited liability aspects of a sole proprietorship, but include at least two owners.

A limited liability company (LLC) typically has multiple owners who share ownership and responsibility. This ownership structure incorporates some of the benefits of partnerships and corporations, including pass-through income tax and limited liability, without the need for consolidation.

S corporations and C corporations are similar to public corporations with shareholders. However, these types of companies can remain private and are not required to file quarterly or annual financial reports. An S corporation cannot have more than 100 shareholders and is not subject to taxation on its profits, while a C corporation has an unlimited number of shareholders but is subject to double taxation.

Advantages and disadvantages of private companies

The high cost of conducting an IPO is one reason why many small companies remain private. Public companies also require more disclosure and must regularly release financial statements and other documents publicly. These documents include the Annual Report (10-K), Quarterly Report (10-Q), Significant Events (8-K) and Proxy Statement.

Another reason for companies to remain private is to maintain family ownership. Today, many of the largest private companies have been owned by the same family for generations, such as the aforementioned Koch Industries, which has been in the Koch family since its founding in 1940. Keeping it private means the company doesn’t have to be accountable to its public shareholders or choose a different board member. Some family businesses have gone public, and many maintain family ownership and control through dual-class ownership structures, which means family businesses can have more voting power.

Going public is the final step for a private company. An IPO costs money, and it takes time for a company to form. Fees associated with listing include SEC registration fees, Financial Industry Regulatory Authority (FINRA) filing fees, stock exchange listing fees, and payments to underwriters of the offering.

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