xavierarnau / Getty Images While many private companies are small, family-owned businesses, they may also include much larger corporations. Well-known companies that remain private include Koch Industries, Publix Super Markets, and Fidelity Investments.
Alternate name: Privately held company, closely held company
How Do Private Companies Work?
A private company doesn’t issue public shares. Instead, it’s owned by an individual, a family, or a group of private investors. Two important characteristics of private companies are how they raise capital and their reporting requirements. First, private companies don’t raise capital by issuing public equity and debt securities. Instead, all funding comes from private sources, including venture capital, private equity, angel investors, and private borrowing. Despite the fact that private companies have fewer options for raising capital, there are still many reasons a firm might choose to remain private. First, the lack of reporting requirements is a strong argument. And in recent years, there has been an increase in the amount of private funding available. As a result, companies may no longer need to go public to acquire the necessary capital to grow.
Types of Private Companies
Sole Proprietorship
A sole proprietorship is the simplest type of private company and the easiest to form. Anyone who begins operations but doesn’t register as another business structure is automatically a sole proprietor. Under this business structure, there is no legal distinction between the business and the business owner. All of the income, assets, and liabilities of the business are also the income, assets, and liabilities of the individual. Sole proprietorships have just one owner.
Partnership
A partnership is a simple structure for businesses with two or more owners. These businesses are usually structured either as limited partnerships or limited liability partnerships. In the case of a limited partnership, there is one general partner who is fully liable for all business obligations. There are also one or more limited partners who are liable only for the amount of funding they’ve put into the business. A limited liability partnership is similar, but without individual partner responsibility for the debts and obligations of the business or the other partners.
Limited Liability Company
A limited liability company (LLC) combines the benefits of the other business structures. First, like a sole proprietorship, LLCs don’t have to pay corporate taxes. Instead, all profits and losses of the business pass directly to the owner or owners. But unlike a sole proprietorship, the business and the owner are legally separate, and the owner isn’t responsible for the liabilities of the LLC.
Corporation
A corporation is a type of business that is entirely legally separate from its owners. The corporation is its own legal entity with its own profits, liabilities, and taxes. This type of private company offers the most legal protection for the owners, leaving them without responsibility for any obligations of the business. However, the business must pay taxes on its profits before they can be passed on to the owners. In addition to the standard C-corporation, private companies can also register as an S-corporation, allowing profits to pass through to the owners without being subject to corporate taxes. Private companies often register as corporations if they plan to go public in the future, but that’s not always the case.
Private Company vs. Public Company
A public company, on the other hand, is one that issues securities on a public market and discloses business and financial information through the SEC. A company goes public through an initial public offering (IPO). Once a company has gone public, all shareholders are partial owners of the company and often have voting rights.
Pros and Cons of Private Companies
Pros Explained
Fewer reporting requirements: Private companies aren’t required to register with the SEC or report financial information. Not only does this provide time and cost savings for private companies, it allows them to keep their information private.Retained ownership: A private company is owned by one or more private owners without any public ownership. As a result, founders can retain more control over their own companies. They don’t necessarily have to accept the input of other investors or be pressured by shareholders.More options for business structures: Private companies have far more options than public companies when choosing a business structure. Many of these options allow the company to avoid corporate taxes and retain more of the profits.
Cons Explained
Fewer options for raising capital: When a public company wants to raise capital, it has many options available, including issuing public equity or debt securities. Private companies have fewer options; these often include loans, venture capital, private equity, and other private investments. Illiquid stock: When you own shares in a public company, in most cases you can easily resell them. When you own or invest in a private company, it’s not that easy. Less transparency for investors: The lack of reporting requirements might be a perk for the business, but it could be a downside for investors who aren’t kept as informed about the financial goings-on of the company.
What It Means for Individual Investors
Private companies don’t issue public shares on stock exchanges, meaning you can’t simply buy shares in them through your brokerage account. However, just because a company is private doesn’t mean it doesn’t have investors and shareholders. These investors usually consist of venture capital and private equity firms. As a result, there’s little chance of an individual investor being able to participate. Even if the opportunity to invest in a private company does arise, there may be significantly more risk for an individual investor. For one thing, investments such as private equity tend to be illiquid, requiring investors to keep their money in for a certain amount of time. Additionally, unlike in the case of public companies, investors may have access to less of the company’s financial information.
