What Is the Difference Between a Closely Held Corporation & a Publicly Held Corporation?
Closely held corporations and publicly held corporations are the two primary types of corporations. One isn’t necessarily better than the other; both have pros and cons. All corporations start off as closely held corporations and may become publicly held corporations, which can cause the company to succeed or fail.
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Closely Held Corporation
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A closely held corporation, also known as a privately held corporation, is not traded on the stock market. Usually it is owned by the founders or by a small group of people to whom the founders sold the company. Private investors also may own a portion of the company. Closely held corporations do not have to disclose their financial information to the public and may keep all records private because they are not regulated by the U.S. Securities and Exchange Commission.
Publicly Held Corporation
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A public corporation sells its shares on a stock market such as the New York Stock Exchange or the NASDAQ; anyone can buy shares of the company. The stock of the company dictates its overall market value: When demand for the company is strong and the company prospects appear favorable, the company’s stock usually increases in price, thus increasing the company’s overall market value. Publicly held corporations must disclose their financial information each quarter, including quarterly profits and revenue. Investors and analysts estimate how they expect a company to perform financially each quarter. If the company misses or surpasses those estimates, company stock usually goes up or down.
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Shareholders
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Whoever buys a portion of a publicly held corporation’s stock becomes a shareholder of that company. Publicly held corporations must divide their attention between customers, shareholders and employees, which can become a cause of conflict at times. Companies often view shareholders as the most important group because they have helped the company raise money. Take for example a company that struggles to make a profit year after year. Shareholders may stress that the company needs to slash expenses, which could result in less benefits for employees and poorer quality products and services for consumers. Closely held corporations also have shareholders, but they consist of those who founded the company, invested in the company or take on a vital role in the company. So the expectations of a privately held company aren't influenced by public shareholders, but rather by those who operate the company and who have close ties to it.
Funding
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Closely held corporations can only raise capital through their own operations or through the investments of private funders, often known as venture capitalists, who take shares of the company in return for pumping in capital. Publicly held corporations can raise capital by selling more shares of stock on the open market. Sometimes investors in a closely held corporation, especially venture capitalists, push the company to go public so that they can easily sell their portion of the company’s stock.
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