Table of Contents
- What Is a Private Company?
- Key Takeaways
- How Private Companies Work
- Types of Private Companies
- Advantages and Disadvantages of Private Companies
- Private vs. Public Companies
- What Are Examples of Private Companies?
- What Is the Average Size of a Private Company?
- How Does Ownership of a Private Company Differ from a Public Company?
- The Bottom Line
What Is a Private Company?
Let me tell you directly: a private company is a firm that's held under private ownership. You might think of it as a business where shares can be issued and shareholders exist, but those shares aren't put out through an initial public offering (IPO) and they don't trade on public exchanges. This means private firms aren't bound by the Securities and Exchange Commission's (SEC) filing requirements. Their shares are generally less liquid, and figuring out their valuations can be tougher.
Key Takeaways
Here's what you need to grasp: a private company is simply a firm that's privately owned. These companies can issue stock and have shareholders, but their shares don't trade on public exchanges and aren't issued via an IPO. Types like sole proprietorships, LLCs, S corporations, and C corporations all fall into this category.
How Private Companies Work
You should know that private companies are often called privately held companies. They vary widely in size and scope, from the millions of individually owned businesses in the U.S. to dozens of unicorn startups around the world. They follow different rules for shareholders, members, and taxation. In 2024, major U.S. firms like Cargill and Koch Industries, which pull in huge annual revenues, are prime examples of private companies.
Staying private can make it hard to raise money, which is why many large private firms eventually go public through an IPO. While private companies can get bank loans and some equity funding, public companies have the option to sell shares or raise money via bond offerings with more ease.
Types of Private Companies
Let's break this down for you. A sole proprietorship is an unincorporated business owned by one person—it's not a separate legal entity, so all assets, liabilities, and financial obligations land squarely on the individual owner. This gives you total control over decisions, but it also amps up the risk. You don't file corporate taxes; instead, you report business income and expenses on your personal tax return.
Partnerships involve at least two owners and share the unlimited liability of sole proprietorships. Then there's the limited liability company (LLC), which often has multiple owners sharing ownership and liability. An LLC combines benefits from partnerships and corporations, like pass-through income taxation and limited liability, without full incorporation. Regulations for LLCs differ by state.
S corporations and C corporations are like public companies in having shareholders, but they stay private and skip quarterly or annual financial reports. S corps are limited to 100 shareholders and aren't taxed on profits, while C corps can have unlimited shareholders but face double taxation.
Advantages and Disadvantages of Private Companies
High costs and strict regulations are key reasons companies stay private, as it lets them keep expenses low—think avoiding IPO costs, skipping burdensome paperwork like financial statements or annual reports (10-K), and not having to disclose progress and spending to regulators or the public.
Being private means owners retain more control, which works well for family-run companies. Koch Industries has stayed in the Koch family since 1940. But these companies often struggle to raise capital since they don't trade on public stock exchanges.
Owners can be personally liable for the company's financial health. If a private company hits financial trouble, the owner might be on the hook for debts and obligations, which can hurt personal credit scores, especially in cases of default.
Pros and Cons
- Pros: Avoid high costs of going public, avoid regulatory paperwork and hurdles, no need for public disclosure, retain control.
- Cons: Raising capital may be difficult, financial liability falls on owner(s), potential for disagreements and conflicts among partners.
Private vs. Public Companies
Unlike private companies, public entities must follow rules from financial regulators like the SEC, requiring full transparency and regular paperwork such as quarterly and annual reports, proxy statements, changes in beneficial ownership, and income statements.
Private companies have private ownership, aren't subject to regulation, don't need to file disclosures, avoid public scrutiny, and lack access to capital markets. Public companies divide ownership among shareholders, face financial regulation, must file disclosures and statements regularly, endure public scrutiny, and can access capital markets.
What Are Examples of Private Companies?
Examples include Koch Industries, Cargill, Deloitte, IKEA, and Ernst & Young. In 2022, X (formerly Twitter) was public until Elon Musk bought it and made it private.
What Is the Average Size of a Private Company?
Private companies range from small businesses to large corporations, including everything from a small mom-and-pop convenience store or dry cleaner to mid-sized and large corporations.
How Does Ownership of a Private Company Differ from a Public Company?
Public companies are the opposite: their ownership is divided into shares sold to the public, starting with an IPO, then traded on stock exchanges in the secondary market. Equity in a public company is held by insiders and outside investors.
The Bottom Line
Many global companies are private, like IKEA, Ernst & Young, and X. The owner or owners keep control and aren't under regulator scrutiny. However, these companies can't raise money through capital markets for growth or debt payment, and their shares aren't sold publicly.
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