A private company is a firm held under private ownership. While private companies may issue stock and have shareholders, their shares are not issued through an IPO or traded on public exchanges. The absence of public trading means they are not subject to the SEC’s strict filing requirements imposed on public companies. Consequently, their shares are generally less liquid, and valuations are more challenging to determine.
Key Takeaways
- A private company remains privately owned.
- Stock may be issued, but it doesn’t trade publicly via IPOs.
- High IPO costs often deter private companies from going public.
- Types include sole proprietorships, LLCs, S corporations, and C corporations.
How Private Companies Operate
Private companies can vary in size and scope, from individually owned businesses to large enterprises like Cargill and Koch Industries. While opting to remain private can complicate raising funds, it circumvents the extensive requirements imposed on public companies by the SEC.
In the U.S., there are four main types of private companies:
- Sole proprietorships
- Limited liability companies (LLCs)
- S corporations (S-corps)
- C corporations (C-corps)
Each carries distinct rules concerning shareholders, memberships, and taxation.
Types of Private Companies
Sole Proprietorship
A sole proprietorship places company ownership in the hands of one individual. It does not exist as a separate legal entity, attributing all assets, liabilities, and obligations to the owner. This grants full control but also increases exposure to risk and raises difficulties in securing funds.
Limited Liability Company (LLC)
An LLC can have multiple owners who enjoy shared ownership and liability protections. This structure blends benefits of partnerships and corporations, including pass-through income taxation and limited personal liability. However, regulations for LLCs may vary by state.
S and C Corporations
These entities are analogous to public companies with shareholders but are exempt from filing quarterly or annual financial reports. S Corporations can have no more than 100 shareholders and are not taxed on profits, while C Corporations have no shareholder limit but face double taxation.
Advantages and Disadvantages of Private Companies
Advantages
- Cost Management: Companies avoid high IPO-related costs and burdensome compliance paperwork.
- Retained Control: Owners keep tighter control without answering to public investors, regulators, or the press.
- Privacy: Companies can maintain confidentiality over their operations and financial status.
Disadvantages
- Fundraising Challenges: Lack of access to public stock exchanges limits capital-raising options.
- Liability Risks: Owners might be personally liable for debts and other obligations during financial distress.
- Potential Conflicts: Multiple owners or partners may face conflicts over decision-making and company direction.
Private vs. Public Companies
Public companies differ hugely from private entities primarily in ownership and regulatory requirements. Ownership in public companies is shared broadly via stock traded on exchanges, beginning with an IPO. Public companies must also meet rigorous transparency standards and file frequent financial disclosures.
Key Differences Between Private and Public Companies
| Private Company | Public Company | |
|---|---|---|
| Ownership: | Private | Publicly traded |
| Regulation: | Limited requirements | Heavy regulatory obligations |
| Disclosure: | Minimal | Extensive required disclosures |
| Scrutiny: | Low | Subject to public and regulatory scrutiny |
| Capital Access: | Limited | Broad access to capital markets |
Examples of Private Companies
Private companies can be small businesses as well as large corporations. Some notable examples include:
- Koch Industries
- Cargill
- Deloitte
- IKEA
- Ernst & Young
Recently, X (formerly known as Twitter) became private again after a takeover by Elon Musk in 2022.
Who Owns a Private Company?
Private companies are owned by their shareholders, including founders, management, and other stakeholders. Unlike public companies, these shares are not traded on stock exchanges and are not diluted.
Differentiating Between C and S Corporations
Both C and S corporations are private, but they are distinguished primarily by their tax obligations. A C Corporation pays federal income tax, whereas an S Corporation’s profits and losses pass through to shareholders’ tax returns, avoiding corporate taxation.
The Bottom Line
Large players like IKEA and Ernst & Young exemplify thriving private companies. While staying private means keeping control with reduced regulatory burden, it also disadvantages the company by limiting financing options to spur growth or tackle debt. Therefore, investing in such entities is not feasible for the public.
Related Terms: sole proprietorship, LLC, S corporation, C corporation, public company.
References
- Library of Congress. “U.S. Private Companies”.
- Forbes. “America’s Largest Private Companies”.
- U.S. Small Business Administration. “Choose a Business Structure”.
- U.S. Securities and Exchange Commission. “Exchange Act Reporting and Registration”.
- Securities Exchange Commission. “Ex-99.3 4 Dex993.html Summary of Koch Industries History”,
- The New York Times. “Elon Musk Completes $44 Billion Deal to Own Twitter”.
