Private vs. Public Company:?An Overview
A private company is a company held in private hands. This means that, in most cases, a company is owned by its founders, management, and/or a group of private investors. The public isn't privy to its business.
A public company is a company that has sold a portion of itself to the public via an initial public offering (IPO), meaning shareholders have a claim to part of the company's assets and profits. Public disclosure of business and financial activities and performance is required of public companies.
Both private and public companies can contribute to the financial health and well-being of economies and nations through their business activities, employment opportunities, and wealth building.
Read on to learn more about a private vs. public company and the differences between them.
- A private company usually is owned by its founders, management, and/or a group of private investors.
- Information about its operations and financial performance is not available to the public.
- A public company has sold a portion of itself to the public via an initial public offering.
- After the IPO, a public company usually trades on a public stock exchange.
- The main advantage public companies have over private companies is their ability to tap the financial markets for capital, by selling stock (equity) or bonds (debt).
A popular misconception is that privately-held companies are small and of little interest. In fact, many big-name companies are privately held. Take Mars, Cargill, Fidelity Investments, Koch Industries, and Bloomberg, for example.
Private companies are owned by those who establish them and those invited to invest in them. The public-at-large cannot buy shares or otherwise invest in private companies at their own discretion.
Because they're not owned by the public, private companies' executives/management don't have to answer to stockholders or provide any company information to the public. And they aren't required to file disclosure statements with the Securities and Exchange Commission (SEC).
Capital for Growth
A private company can't use public capital markets to raise funds when it needs them. It must turn to private funding. That means private companies fund their growth with profits from operations and/or by borrowing money from banks, venture capitalists, or other types of investors.
Importantly, while a privately-held company can’t rely on getting cash by selling stocks or bonds in public markets, it may still be able to sell a limited number of shares without registering with the SEC, under Regulation D. In this way, private companies can use shares of equity to attract investors.
It has been said that private companies seek to minimize the tax bite, while public companies seek to increase profits for shareholders.
A public company is usually a very large business entity and is normally listed and traded on a public exchange. To continue trading publicly, exchanges require public companies to meet certain standards. For example, the New York Stock Exchange requires that public company maintain a market capitalization of $15 million.
Once a public company's stock shares trade on public stock markets, they can be bought and sold by people outside of the company. So, the company is owned by those within the organization who possess shares of company stock and by members of the general public. As a consequence, members of the public who own shares have a stake in the company and company management can be influenced by their opinions related to the company's business.
In addition, a public company is required to disclose certain business and financial information regularly to the public. This information reaches the public as annual reports, quarterly reports, and current reports (such as 10-K, 10-Q, and 8-K) that are filed with the SEC.
Capital for Growth
A main advantage publicly traded companies have is their ability to tap the financial markets for needed capital for expansion through mergers and acquisitions, for internal projects that can drive profits and growth, or for other needs.
They do this by selling stock (equity) or bonds (debt).
For example, a public company may issue bonds which investors purchase. In this way, investors make loans to the company. The company will have to repay these loans with interest. But it won’t have to surrender any shares of ownership in the company to the investor.
Thus, bonds can be a good option for public companies seeking to raise money, especially in a depressed stock market. However, a company could also raise capital by selling additional shares. By doing so, it may relieve itself of the burden of repaying bonds.
Private companies are owned by founders, executive management, and private investors. Public companies are owned by members of the public who purchase company stock as well as personnel within companies (founders, managers, employees) who possess shares of company stock as a result of the IPO and purchases.
Because they are entitled to a say, public company shareholders not involved in the company in any way other than shares ownership can have an impact on the management and operations of public companies.
Source of Capital
Private companies normally obtain needed capital from private sources, such as their shareholding owners or private investors (e.g., venture capitalists). They can also raise funds by getting loans from financial institutions.
Public companies obtain needed capital by selling shares in the public marketplace or by issuing debt. This makes capital easier to get hold of for public companies compared to private companies.
Public companies are required by the SEC to regularly inform shareholders and the public of their financial activities, business activities, and business results by filing periodic reports and other materials with the government.?
Private companies aren't required to make their company information public or register with the SEC (although legislation has been introduced in the U.S. Senate to require some to do so).
News about public companies, unwelcome and not, is reported regularly by the press and other media. Private companies typically don't experience such publicity.
Normally not subject to SEC regulation
Owned by founders and private investors
Access to capital through owners, investors, and through private loans
Not subject to public scrutiny
Must register with SEC and file regular financial reports
Owned by those inside and outside the company who possess/buy shares
Access to capital through public markets, such as stock and bond markets
As shareholders, members of public can vote and share opinions about company matters (which can also be publicized by media)
Public companies are required to register and file company information with the SEC as part of its mission to protect investors, maintain fair, orderly, and efficient markets, and provide for access to capital by companies and entrepreneurs.
Examples of a Private vs. Public Company
The 10 largest private companies as of 2022, measured by revenue:
- Cargill $165 billion
- Koch Industries $125 billion
- Publix Super Markets $48 billion
- Mars $45 billion
- Pilot Company $41.9 billion
- H-E-B $38.9 billion
- Reyes Holdings $35.3 billion
- C&S Wholesale Grocers $33 billion
- Enterprise Holdings $30 billion
- Love's Travel Stops & Country Stores $25.5 billion
The 10 largest public companies, as of September 2023, measured by market capitalization:
- Apple $2.74 trillion
- Microsoft $2.52 trillion
- Saudi Aramco $2.19 trillion
- Alphabet $1.74 trillion
- Amazon $1.49 trillion
- NVIDIA $1.12 trillion
- Tesla $872 billion
- Berkshire Hathaway $805.85 billion
- Meta Platforms $799.71 billion
- Eli Lilly $567.41 billion
Why Do Private Companies Go Public?
They may go public because they want or need to raise capital and to establish a source of future capital.
Can a Public Company Become Private?
Yes, as long as a shareholder vote supports such an action. Normally, the company has to buy back (or own already) enough of its shares to control the voting for this move.
Which Is More Transparent, A Private or Public Company?
Both can be transparent about what they do, their financial performance, and business results. However, a public company is required to provide a wealth of information about itself to the SEC, and in turn, the public-at-large, on a regular basis. A private company need only be transparent to its private owners.
The Bottom Line
Private and public companies can contribute to the economic health and financial well-being of their communities, states, and nations. But while both types of companies, broadly, operate businesses to earn revenue and make profits, they differ in ownership, public disclosure needs, government oversight, and access to capital.