Privately Held Company Vs. Public Company

In this article, Privately held company vs. public company, we shall discuss some major differences between them.

Definition

A privately held company, as the name suggests, is wholly owned privately. The investors in the company may include founders, management, employees, and/or private investors. In contrast, a public company sells all or part of its shares to the public by bringing in an IPO (Initial Public Offering) on a stock exchange. Like a privately held company, the investors of a public company may include founders, management, employees, and private investors. Additionally, the investors can also be institutional buyers, brokers, and the general public at large.

Stocks Traded on Public Stock Exchange Vs. Private Investors

From the definition, we can understand that shares of a privately held company do not have to be listed on a stock exchange. Whenever a privately held company needs equity investment, its owners will have to come up with the required capital, or it will have to approach private investors and seek investment.

Conversely, it is mandatory for a public company to list its shares on a stock exchange such as NYSE, NASDAQ, Tokyo Stock Exchange, etc. The public company’s shares will then be open to trade in the respective stock exchange and can be easily bought and sold via a broker.

Reporting Requirements and Regulations

As a public company offers its stock to the public at large in The USA, it comes under the regulations umbrella of the Securities & Exchange Commission (SEC). Thus the regulations applicable to such companies are very stringent. In case of any discrepancy in compliance, the SEC keeps an eye on such public companies. This is not the case with privately held companies. Privately held companies are independent and have a greater level of freedom when it comes to regulatory requirements.

Availability of Information

A lot of data about any public company is available publically. This is mainly because the disclosure requirements for a public company are higher than for a privately held company. Normally, the following data is usually available for a US-listed public company:

  • Annual Reports on Form 10-K include annual financial statements, i.e., income statements, balance sheets, and other related accounting statements.
  • Quarterly Reports on Form 10-Q – These include all the quarterly financial statements
  • Current Reports on Form 8-K – These include information on the major events about the company, such as a change in corporate leadership, bankruptcy proceedings, etc.
  • Proxy Statements – Proxy statements report the decisions that need shareholders’ voting in the near future.
  • Additional Disclosure Information includes all other information such as proposed mergers, tender offers, etc. This information may be important to investment decision-making.

Apart from this primary data, a lot of secondary information is also available about a public company, including historical stock price data, technical & fundamental reports, other analyst reports, etc. All this data helps investors make investment decisions.

On the other hand, a privately held company is completely opaque, there is absolutely no information available publically sensibly so because the public doesn’t need information about a privately held company.

Privately Held Company Vs. Public Company

Sources of Funds

There are fairly fewer sources of funds available to a private company. A private company can only approach private investors (angel investors/ venture capitalists) to raise equity capital. In contrast, a public company can sell a block of its authorized share capital in the stock market to raise equity capital.

Moreover, the debt available to a privately held company is limited to bank loans and other forms of loans. On the other hand, a public company can raise the debt by issuing debentures, bonds, commercial papers, etc., for sale in the market.

Size

Public companies are always large companies with substantial market capitalization and usually have millions of dollars in revenue. On the other hand, privately held companies can be small or large in size. It can be the small mom-and-pop store around the street or a corporate giant such as Mars Incorporated.

Valuation

It is much easier for a market analyst or an investor to value a public company. The reason is a lot of data about a public company is readily available from financial reports, proxy statements, technical data of the stock price, historical data, etc.

On the other hand, the valuation of a privately held company is extremely difficult. Chiefly due to limited availability of information on a privately held company. To process the company’s valuation, an analyst has to ask for all the data from the organization’s management.

Structure

A public company can only have the structure of a corporation. Corporation whose shares are traded publically and has a board of directors to manage and advise the company. Conversely, a privately held company can have various structures such as a sole proprietorship, partnership, limited liability partnership, private limited company, etc.

Control

The owners and the management of a privately held company have higher control over their company as they are not answerable to shareholders and analysts. In contrast, a public company has to constantly justify each of its decision to market at large. This makes any decision-making process lengthy and complicated for the management of a public company. Moreover, the level of control over the company also reduces as they can’t take high-risk decisions without an effect on share prices.

Formation and Dissolution

A privately held company is easy to form and dissolve. Especially one can form or dissolve a sole proprietorship or a partnership at the proprietor’s/partner’s discretion. There is a requirement of only a simple registration. Conversely, the formation and dissolution of a public company is a lengthy procedure with multiple procedural requirements. The registration alone has multiple requirements. The same is for bringing in an IPO (initial public offering).



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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