What’s the Difference Between Public and Private Companies?

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by Advice Chaser
by Advice Chaser

There are many different ways to categorize different types of businesses. They can be sole proprietorships or partnerships, LLCs or C-Corps, for-profit or non-profit. One important distinction is between public and private companies. A private company is owned by individuals, while a public company has been sold on the stock market and belongs to shareholders.

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Private Companies

A company is generally private when you first start out. You can keep it private indefinitely if you want. If so, you will maintain control over your business and not have to answer to shareholders. As long as your private company has under $10 million in assets and 500 shareholders, you don’t have to file disclosures with the Securities and Exchange Commission (SEC). This both decreases your bureaucratic hassle and means you can keep information about your profits and losses private.

Private companies can be sole proprietorships, partnerships, LLCs, or corporations. You can have a single owner (yourself) or a board. If you want to keep control over your business operations and choose your own successor, keeping your company private is the only way to be sure. Even very large companies remain private. There’s no obligation to become a public company at any point.

Raising capital is more difficult without access to the stock market. You can still take out business loans or accept the assistance of venture capital. You may have a few private investors or shareholders. And, of course, you have the profits of the company to reinvest in its success. 

Although a private company is not listed on the stock market, you can still sell securities under certain restrictions. This is called a private placement or unregistered offering. It’s considered risky for investors, since it hasn’t been registered with the SEC. You can only sell to stockholders within the company or to accredited investors outside the company. If you want to raise capital this way, you should consult a professional to ensure you are complying with all laws. This will also allow you to show investors you aren’t a scam. Scams are rampant with unregistered offerings.

Public Companies 

To solve the difficulty of raising capital, many companies choose to go public. A public company is registered with the SEC and can sell shares on the stock market. This allows them to raise capital, but it means the original founder no longer owns the entire company. Instead, the shareholders own percentages of it.

A public company must have a board of directors and make quarterly and annual disclosures to the SEC. Company insiders, such as board members and executives, must disclose when they buy or sell company stock.

The board of directors will be regularly elected by the shareholders. It contains both inside directors, company insiders who already work in the business, and outside directors, who aren’t otherwise involved with the company. The New York Stock Exchange and NASDAQ both require boards to consist of over half outside directors. This means your company will no longer be under your personal control. It’s now up to the shareholders what direction your company takes.

Transitioning Your Company from Private to Public

A private company can become public through a process called the initial public offering (IPO). This allows you to raise money through selling shares. Typically, companies wait till they’re worth about a billion dollars before going public. Small companies aren’t ready for the bureaucratic burden of an IPO.

An investment bank serves as underwriter and will shepherd you through the process. Together, all interested parties—company management, the investment bank, lawyers, accountants, and SEC experts—will draft a statement called the S-1 Registration Statement. This includes past financial statements, risk factors, details about the company, and more. It shows you have done due diligence in disclosing everything potential buyers should know.

After that, a price is set based on the company’s expected value and demand. Outside investors can order shares, and current investors’ private shares become public. They can keep holding their shares or sell them to outside investors. The company makes money from the sale of new shares, allowing it to grow and make capital improvements.

The entire process can take six months to a year, as well as involving considerable expense. It isn’t an easy way to drum up capital. However, for large companies ready to expand, it can make sense.

Can it be reversed? Yes, it is possible for a public company to go private again. But you would have to buy back a majority of shares first. After that, you can delist the company and take it private once again.

Don’t Run a Business Without an Advisor

As you can see, running a company becomes more complex when you go from private to public, or when it becomes larger. Even a small business can benefit from sound financial advice, but the larger you get, the more important it is to have professionals advising you. To find a business financial advisor, contact us today. We can connect you with someone with the right training and experience.

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