Privately Held Company – Meaning
As the name suggests, a privately held company is a company that is wholly owned by the company’s founders, management, or private investors. Equity of the privately held company is not listed on the public stock exchange. Moreover, the shares of such companies are not open for sales and trading to the general public at large. Even the government cannot have ownership or investment in a privately held company.
There are different ways of structuring privately held companies. It has got many types. Examples include sole proprietorship, partnership, private limited companies, limited liability partnerships, non-profit corporations, etc.
- Privately Held Company – Meaning
- Major Privately Held Companies in the World
- Advantages of a Privately Held Company
- Disadvantages of a Privately Held Company
When we talk about privately held companies, people usually think of small companies such as the innumerable number of pizza delis all over the USA owned and operated by a family or an individual. However, this picturization is not 100% correct. Many privately-held companies in the world are giant, major corporations. Following are some such examples –
Major Privately Held Companies in the World
- Mars Inc.
- Dell Inc.
- Koch Industries, etc.
Now that we understand what a privately held company is, let’s understand its advantages and disadvantages.
Advantages of a Privately Held Company
Privately held companies are not listed on any stock exchanges. Therefore they are not liable to file with the SEC or disclose their financial statements or other financial information. This reduces the paperwork of the company, thereby making simple the day to day operations function and flow.
With limited disclosure comes confidentiality. Since a privately held company doesn’t have to adhere to disclosure requirements, its financial and operational information remains confidential. The company or its management doesn’t have to worry about the market reaction to a bad financial year or how to be in the good books of analysts. Furthermore, as the public doesn’t know the company’s information, it has a competitive advantage that comes with the privacy of information.
Freedom and Control
This is the best and the biggest advantage of a privately held company. A public company listed on the stock exchange has to constantly keep working to maintain its share price. Share price depends on many factors such as the company’s growth, strategy, management, market sentiment, sector performance, etc. Suppose a public listed company wants to develop a new market channel, and the stock market doesn’t take this development positively. It could damage the reputation and stock price of the public company. In contrast, a privately held company doesn’t have to consider these factors at all. It can simply take decisions that it thinks will do good.
Furthermore, the management of a privately held company is not answerable to the board of directors, institutional investors, or SEC. This gives it a high level of freedom to operate and more control over the company.
Separate Legal Entity
As discussed at the beginning of this article, a privately held company can be structured in different ways. When a privately held company is structured as a private limited company or a limited liability company, it becomes more beneficial for the owners and stakeholders. In the sense when the company incurs losses or becomes insolvent, the owner’s liability limits their ownership in the company, and their private assets remain safe. These structures give the benefits of both a public company and a private company to the owners of a privately held company.
Saving on Cost
As discussed, a privately held company doesn’t have a filing or disclosure requirement. Due to these, the company doesn’t have to do the required paperwork, thereby saving a whole lot of administration costs and workforce. Furthermore, the SEC filing involves fees and legal expenses. A privately held company saves on all these fees and expenses as well.
Let alone these, a privately held company also saves a lot during its formation. The formation and registration requirement in this is also to a limit, thereby saving a lot of time and money.
Disadvantages of a Privately Held Company
If in need of capital, a public company can issue a block of their authorized capital in the market and raise the necessary capital. However, raising equity capital doesn’t come so easy for a privately held company. The stakeholders are owners, management, and private investors, and in case of capital requirements, one or a mix of the stakeholders have to come up with the required capital on their own. Consequently, limited capital is available to a privately held company.
Limited Access to Credit
Usually, the credibility of a privately held company is lower than a public company. This is because the functioning of this company is dependent on the life and wealth of its stakeholders. For example, in a sole proprietorship, if the proprietor dies, then there are high chances of company closure. This is a major disadvantage. When a privately held company approaches a banker for a loan or a credit line, the banker assesses these companies with a pinch of skepticism. This leads to higher interest rates and limited lending.
This is a dangerous disadvantage if a privately held company is a sole proprietorship or a partnership. In such a structure, the liability of owners and partners is unlimited. So, in case of losses or heavy debts, the owners or partners have to bank their personal assets to cover the loss and repay the debt. It can become very risky.
Responsibility / Lack of Professional Advice
As a privately held company, owners and stakeholders have to take up a higher level of responsibility. This is because they are in charge of the company’s growth and wellbeing. Moreover, there is a lack of accountability that comes with being the sole owner. There are no public shareholders, the board of directors, or financial analysts in the picture. This makes the need for taking responsibility proactively even higher.
Additionally, owners of a privately held company do not have access to professional advice as easily or readily available as a public company. A public company has a well-educated, qualified, and experienced board of directors. During the annual general meeting and/or regular meetings, the management can always take advice from the board. Owners of a privately held company have to seek such advice outside the company.
Regardless of its disadvantages, sometimes a business model of certain companies is such that it is a perfect fit as a privately held company only. For example, if a home baker wants to expand to a small bakery, it will go for a sole proprietorship or a partnership; it makes no sense for her to take her company public in the initial stage. In summation, we can say each company structure has its advantages and disadvantages and one can choose a structure that is most suitable for their current business needs.
Also read – Privately Held Company Vs. Public Company to know bout the differences between the two.