What Is the Difference Between a Publicly & Privately Held Corporation?
When business owners form a corporation, they can keep the company private or take it public. Private firms are owned and operated by private owners and managers. Public firms are owned by the company’s investors. The Securities and Exchange Commission established a specific process to take a company public. Distinct differences exist between public and private corporations. Business owners should know the characteristics, advantages and disadvantages of both public and private firms to know which structure best fits their companies.
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Ownership
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Public companies are owned by shareholders who invest their money in the company's common and preferred stocks. Individuals sitting on the board of directors in a public company are voted in by shareholders. The decision-making process in a public firm is formal and the management team must make decisions with shareholders in mind. Most private companies are owned by the individuals who founded the company. The initial owners typically make decisions on behalf of the corporation without any outside influences. Managers of private companies tend to possess more flexibility than managers of public companies when making business decisions.
Public Disclosure
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Public companies must make their financial statements accessible to the public on a quarterly basis by filing their statements with the Securities and Exchange Commission. Public companies operate under the scrutiny of governing agencies. If a public company fails to comply with the rules of the SEC, the corporation may face penalties. When a company goes public it must make its prospectus available to the public. The prospectus includes important information about the company’s financial status and management. Some firms consider this an disadvantage of going public because sensitive information is also made available to competitors. In contrast, private companies are not required to release its financial statements to the public. Private companies possess the ability to keep all sensitive information regarding the firm private. Only when a private company decides to go public is it required to release certain information.
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Valuation
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The valuation of a public corporation differs from a privately held corporation. When valuating a company, a private firm tends to possess less value than a public firm. Several factors are taken into consideration during the valuation process. Market liquidity typically accounts for the biggest difference in the valuation of public companies versus private companies. Public companies are more liquid than private companies because investors can sell a public corporation’s stock quickly in the market place, which makes public companies more valuable. Other considerations include risks, operational differences, operational control and capital structure.
Funding
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Public companies can raise funds by selling shares of stocks and bonds to investors in the capital markets. A private company may issue shares not traded on public stock exchanges. When a public company issues stocks, it is not obligated to pay back money it initially receives from investors. Corporations that issue bonds must pay back money to investors with interest because the company borrows the money. The funds raised by issuing securities are typically used to expand the company. Private corporations must raise funds directly from the owners or seek funding through private investors and banks. The terms of repayment are made and agreed upon between the private corporation and the investors or lenders.
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