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