What is a Public Company?
A public company is a corporation whose shareholders have a claim to part of the company’s assets and profits. It’s often referred to as a publicly traded company. In the UK, this type of company is known as a public limited company (PLC).
Ownership of a public company is distributed among general public shareholders through the free trade of shares of stock on stock exchanges or over-the-counter (OTC) markets.
Key Takeaways
- A public company, also known as a publicly traded company, has shareholders who hold part of its assets and profits.
- Ownership is distributed through free trading of shares on stock exchanges or OTC markets.
- Public companies must disclose financial and business information regularly.
- They must also report securities trading on public exchanges.
Public companies are required to regularly disclose their financial and business information, alongside reporting securities trading on public exchanges. According to the U.S. Securities and Exchange Commission (SEC), a company becomes a public company if it has public reporting requirements.
Transition from Private to Public Company
Most public companies were originally private, owned by founders, management, or private investors. Unlike private companies, public companies must conform to specific reporting requirements when:
- They sell securities in an initial public offering (IPO).
- Their investor base reaches a specific size.
- They voluntarily register with the SEC.
An IPO is the process through which a private company offers shares to the public and begins new stock issuance. Prior to an IPO, the company is private. IPOs are crucial as they provide a vital source of capital for company growth.
Examples of Public Companies: Chevron Corporation, McDonald’s, The Procter & Gamble Company.
To complete an IPO, a company must meet regulations from both the stock exchange it seeks to list on and the SEC. Investment banks are typically hired to market the IPO, determine share prices, and set the stock issuance date. Companies often offer share premiums to private investors as a reward for prior investments.
SEC Requirements
In the U.S., companies with 2,000 or more shareholders (or 500 or more non-accredited investors) must register with the SEC, adhering to its regulatory frameworks.
Advantages of Being a Public Company
Public companies enjoy several advantages over private ones, including access to financial markets, enabling them to raise capital for expansion through the sale of stock or bonds, which are securities representing ownership or a type of loan issued by the corporation.
Public trading on significant exchanges like the New York Stock Exchange adds a level of prestige, indicating operational and financial success.
Disadvantages of Being Public
On the flip side, public companies face heightened regulatory scrutiny, increased reporting obligations, and corporate governance bylaws that diminish control for majority owners and founders. The IPO process and ongoing maintenance involve significant costs in legal, accounting, and marketing efforts.
Public companies must regularly file financial and business reports, including:
- Annual financial reports (Form 10-K)
- Quarterly financial reports (Form 10-Q)
- Current reports (Form 8-K) for significant events
These standards were enforced by the Sarbanes-Oxley Act to prevent fraudulent reporting. Additionally, shareholders get a say on major decisions, influencing mergers, acquisitions, and corporate changes.
Transitioning Back to a Private Company
Sometimes, public companies decide to return to being private to escape the regulatory burden, freeing up resources for R&D, capital improvements, or employee benefits. A “take private” transaction involves private equity firms purchasing/acquiring all outstanding public shares, delisting the company, and operating privately.
Special Cases
Is an Exchange-Traded Fund (ETF) a Publicly Traded Company?
An ETF, like a publicly traded company, trades its shares on stock exchanges, and market dynamics dictate their value. ETFs can be bought just like shares of public companies through brokerage accounts.
What Is a Reporting Company?
A reporting company is synonymous with a public company, adhering to stringent SEC reporting requirements but without necessarily undergoing an IPO.
What Is a Beneficial Owner?
A beneficial owner controls or owns 25% or more of a reporting/public company, exercising significant control over its operations. Such owners must be reported, providing specific information about them.
The Bottom Line
If you’ve ever invested in a mutual fund or pension plan, you probably own stock in public companies, giving you an ownership stake proportional to your shares. You can also choose to invest directly in public companies for a direct stake.
Related Terms: corporation, public limited company, IPO, shareholders, SEC, Sarbanes-Oxley Act, corporate governance
References
- U.S. Securities and Exchange Commission. “Public Companies”.
- Yahoo! “50 Biggest Public Companies in the World”.
- U.S. Securities and Exchange Commission. “Exchange Act Reporting and Registration”.
- Investment Company Institute. “ETF Basics and Structure: FAQs”.
- U.S. Securities and Exchange Commission. “What Does It Mean to Be a Public Company?”
- Financial Crimes Enforcement Network. “Beneficial Ownership Information Reporting Rule Fact Sheet”.
