Whether you are considering investing in a company or starting your own business, understanding the main differences between public and private companies is crucial. These two main types of companies have significant differences that can greatly impact your business decisions. In this article, we will dive deep into the key characteristics and elements of public and private companies, as well as the benefits and drawbacks of each type.

What is a Public Company?

In United States business law, public companies, also known as publicly held companies, are businesses that are traded on the stock exchange. In other words, shares of public companies can be bought and sold by investors on the stock market. The stock is typically sold in order to raise capital for the company. 

What is a Private Company?

Private companies are often owned by the company’s founders, management or private investors. By definition, private companies are not involved in public capital markets. Instead, they rely entirely on private investments and funding.

Contrary to popular belief, private companies are not always small and insignificant. In fact, some of the largest companies in America are private, including Mars, Cargill and Koch Industries.

Main Differences Between Public and Private Companies

Now that you have a basic understanding of private and public companies, let's take a closer look at their key differences.

• Ownership: The main factor that differentiates a public company from a private company is its ownership structure. While public companies are typically owned by a large number of shareholders and their shares are traded on the stock market, private companies are controlled by a small group of individuals or organizations and their shares are not traded as public stock.
• Transparency: Public companies are legally required to disclose their financial information to the public. They must issue annual and quarterly reports, and are obligated to disclose material information that could affect their stock. Private companies, on the other hand, can keep their financial information confidential. However, if a private company merges or is acquired by a public company, they may be forced to disclose investor information.
• Structure: While not always the case, public companies often take the form of a corporation while private companies tend to be structured as a sole proprietorship, partnership or other type of business formation.
• Regulations: Public companies are subject to strict federal and state regulations. According to US law, public companies need to issue both quarterly and annual financial reports to the Securities and Exchange Commission (SEC). Alternatively, private companies do not need to report to the SEC.
• Growth: In general, public companies have the potential to grow faster than private companies since they have greater access to capital. Also, due to their financial transparency, they have higher visibility than private companies. Because private companies depend on private sources for financing, and they do not share the same transparency as public companies, their expansion may be more gradual.
• Liquidity: Liquidity, which refers to the ability to buy or sell shares without affecting the stock’s price, is higher in public companies. This is due to the fact that a public company’s stock can be traded openly on the stock market. Private companies have a lower level of liquidity, since stocks are not as easily transferred between private owners.

Going Public

In the business world, “going public” refers to a private company becoming publicly traded and owned. Specifically, it means that a private business is issuing an initial public offering (IPO), which is the process of offering shares of a private corporation to the public for the first time. In most cases, a company may choose to go public in order to increase prestige, expand ownership and raise capital. IPOs are also used as an exit strategy for venture capitalists to get out of their investment in a company.

An important factor to keep in mind is the legal requirements and obstacles involved in converting a private company to a public company. Consulting with an experienced business attorney is strongly recommended before considering this major decision.

Going Private

Although “going public” may be more commonly known, “going private” is another term that is often considered in business law. This occurs when a company buys back the outstanding shares of the company from public shareholders by means of a leveraged buyout (LBO) or management buyout (MBO). Once the company goes private, shareholders no longer have the ability to trade their stock on the market. A company may choose to go private for a variety of reasons, including increased flexibility, reduced costs and confidentiality. Going private can also have the benefit of being free from the regulations that public companies have to abide by, such as the Sarbanes Oxley Act of 2002.

It should be noted that it is not always ideal or possible for a company to transition from public to private. Speak with a licensed attorney before making any decisions in the matter.

Personalized Legal Support

In conclusion, understanding the key differences between public and private companies will play a key role in helping you navigate the business world. Please do not hesitate to contact one of our seasoned business attorneys if you have any further questions regarding private and public companies.