Difference between public company and private company

Khabarhub

August 4, 2019

5 MIN READ

Difference between public company and private company

Source- Wikipedia Commons

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A public company is a business whose shares can be freely traded on a stock exchange or over-the-counter. A public company is also known by the terms like publically traded company, publically held company, public limited company or public corporation. The stocks of this type of company belong to members of the general public.

Conversely, private companies are privately held, which means that in most cases, the company is owned by its founders, management, or a group of private investors. A public company is a company that has sold all or a portion of itself to the public via an initial public offering (IPO). Those who buy IPOs are called shareholders and they have a claim to part of the company’s assets and profits.

The popular misconception is that privately held companies are small and of little interest. In fact, there are many big-name companies which have chosen to exist as privately held such as Mars, Cargill, Fidelity Investments, Koch Industries, and Bloomberg among many others.

A few top public companies in the world are ICBC, JPMorgan Chase, China Construction Bank, Agricultural Bank of China, Bank of America, Apple and Ping An Insurance Group.

While a privately held company can’t rely on selling stocks or bonds on the public market in order to raise cash to fund its growth, it may still be able to sell a limited number of shares without registering with the SEC (Securities or stock Exchange Commission).

This way, privately held companies can use shares of equity to attract investors. Privately held companies can also borrow money, either from banks or venture capitalists, or rely on profits to fund growth.

The main advantage of private companies is that management doesn’t have to answer to stockholders and isn’t required to file disclosure statements with the SEC. However, a private company can’t dip into the public capital markets and must, therefore, turn to private funding. It has been said often that private companies seek to save taxes, while public companies seek to increase profits for shareholders.

The main advantage public companies have is their ability to tap the financial markets by selling stock (equity) or bonds (debt) to raise capital (i.e., cash) for expansion and other projects. Bonds are a form of a loan that a publicly held company can take from an investor.

It will have to repay this loan with interest, but it won’t have to surrender any shares of ownership in the company to the investor. Bonds are a good option for public companies seeking to raise money in a depressed stock market. Stocks, however, allow company founders and owners to liquidate some of their equity in the company, and relieve growing companies of the burden of repaying bonds.

One of the biggest differences between the two types of companies is how they deal with public disclosure. If it’s a public company, it is trading on a stock exchange and therefore is typically required to file quarterly or half yearly earnings reports (among other things) with the SEC. This information is made available to shareholders and the public.

Private companies, however, are not required to disclose their financial information to anyone, since they do not trade stock on a stock exchange. Usually, the securities of a publicly traded company are owned by many investors while the shares of a private company are owned by relatively few shareholders or just by a single person.

A company with many shareholders is not necessarily a publicly traded company. Publicly companies are usually able to raise funds and capital through the sale (in the primary or secondary market) of shares of stock. But, for private enterprises – significant capital could only come from a handful of wealthy investors or banks willing to risk typically large investments on risk of sinking its loan recovery.

In large number of cases companies or enterprises are first privately held before becoming public enterprises (or public companies) by issuing IPO (Initial Public Offer) and to get listed on SEC. For example, Facebook was a privately held company before the company issued IPO in 2012.

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