Private Company

Private Company
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Out of the 18 million businesses in the United States, fewer than 4,000 are publicly listed on a stock exchange. That means private companies remain the default model of conducting business.
So what are they and how do private companies differ from public companies? Discover more with private company examples, from partnerships to LLCs.
When we define “private company”, we refer to a corporation whose stock is not publicly traded on an exchange. Individuals or groups may own private companies.
Private companies function in much the same way as public companies . Both produce goods or services to generate profits, but the key differences lie in their issuance of company stock, financial disclosure obligations, and reporting requirements.
Private companies issue stock to shareholders and determine how many shares go to each, based on shareholder equity. The number of shares is set at the company’s inception, and each shareholder receives a commensurate number of shares based on their investment. Private company stock is illiquid , meaning that it isn’t easily/quickly sold and turned into cash.
The value of public company shares, however, fluctuates based on supply and demand (since they are traded on public exchanges). Public stocks are considered liquid assets because they can be turned into cash relatively quickly when they’re sold to other investors.
Owners of private companies must report profits and losses on their personal income taxes, but they aren’t required to disclose this information to the public.
Public companies are required (by the SEC) to disclose officer and director salaries/benefits, cash flow, audited financial statements, and notes to any financial statements. This information is disclosed in the company’s annual report.
Many well-known companies are private companies . Some of the most popular private companies examples include service companies such as Deloitte and PriceWaterhouseCoopers, supermarket chains like Publix, and chemical companies like Cargill (the largest private company).
Neither is better nor worse. Companies may choose to become public companies later if they need additional capital . If a private company wishes to sell shares of stock to raise funds, this begins the process of becoming a public company. The process is called an initial public offering (IPO).
An IPO is an expensive and time-consuming process, and it's often the last resort after private companies exhaust other potential funding sources (e.g. loans, angel investors , venture capitalists). Once companies complete their IPO and register with the SEC, their stock is allowed to trade on a public exchange. The company is then called a public company (or publicly-traded company).
When a person starts a company, they must choose from one of the following five legal business structures.
Limited liability corporation (LLC)
Each business structure offers different protection of an owner’s assets (as well as various tax ramifications).
The most common type of business structure, sole proprietors are the sole owner of a business. These owners pay all taxes on business income and are personally liable for the debts of their company.
A business partnership is an agreement between two individuals who share business ownership and responsibility. Each owner passes the partnership income through to their tax returns, paying taxes on the business’ profits. Partners are legally responsible for any business debts and issues that arise from their business activities.
A limited liability corporation (LLC) combines elements of a sole proprietorship/partnership and the legal benefits of corporations – all without the encumbrance of some of the filing requirements of an S or C corporation.
Like a corporation, owners are not usually held personally responsible for the LLC's debts or legal judgments if the LLC is sued. In certain situations, however, a court can hold the owner personally liable. This is referred to as 'piercing the corporate veil' and is more common with smaller LLCs when the business and personal assets of an owner are intertwined with their interests.
Like a sole proprietorship, an LLC is a “pass-through entity.” All profits and losses from the business pass directly to the owner’s personal income tax return.
S and C corporations may be private or public companies. All start as private companies and may choose to transition to a public company through the IPO process.
Both S and C corporations issue stock, vote on officers and directors, hold annual shareholder meetings, and conduct business as a separate legal entity from their owners. Contracts and legal proceedings, however, are in the name of the corporation, not the name of the owner.
C corporations are the default when filing incorporation papers (unless the business completes IRS Form 2553 to elect to become an S corporation).
S corporations are limited to 100 owners (shareholders) and may not be owned by non-resident aliens. An S corporation reports its income to the IRS on Form 1120-S , but the shareholders report profits or losses on their personal income taxes.
C corporations have no limitations on the number or nationalities of owners. They must pay taxes on their corporate income and file separate tax documents annually with the IRS. The owners must also pay taxes on the income received from the company. In effect, this taxes the C corporation income twice: once as a company, the second time through the owner’s income.
One of the biggest advantages of private companies is that they aren’t required to disclose their revenues and profits to the general public. This ensures that information is kept secret from everyone, including their competitors.
In addition, private companies are not subject to the pressure associated with meeting quarterly earnings expectations. This can otherwise conflict with decisions to reinvest back into the business.
Corporate officers do not have to disclose their salaries or benefits to the public nor do they answer to external shareholders.. Shareholders of private companies are usually owners, officers, and directors. Because they don’t answer to external shareholders, there is more freedom to experiment, explore, and take risks than in a publicly-traded company.
Private companies are limited in the shares of stock they’re able to issue (and the stock is also illiquid). Borrowing or taking on debt are the only methods of raising additional capital. It may be difficult to attract top talent without the added incentive of stock options available at public companies.
For more information about the types of business structures in America, see:
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A private company is one that doesn’t issue public shares, and therefore, ownership is retained by an individual, family, or a small number of investors. Because they aren’t publicly traded, private companies aren’t subject to SEC registration and reporting requirements. Private companies can choose any type of business structure, including sole proprietorship, partnership, limited liability company, or corporation. Private companies have fewer options for raising capital, but can still acquire funding through private equity, venture capital, borrowing, and more. Individual investors generally can’t invest in companies using private equity or venture capital, as this option in most cases is only extended to high-net-worth individuals.

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David J. Rubin is a fact checker for The Balance with more than 30 years in editing and publishing. The majority of his experience lies within the legal and financial spaces. At legal publisher Matthew Bender & Co./LexisNexis, he was a manager of R&D, programmer analyst, and senior copy editor.
A private company is a business that doesn’t have public ownership. It doesn’t issue publicly traded shares and is more likely to rely on funding sources such as individual savings, private investors, or borrowing.

A private company is one that doesn’t issue publicly traded shares and isn’t subject to the Securities and Exchange (SEC) reporting requirements for public companies. Private companies are often individually or family-owned, but they may also be owned by private investors and shareholders.

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.

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.

Because private companies don’t issue public equity or debt, they aren’t subject to many of the requirements imposed on publicly traded companies. Private companies don’t have to file a registration statement with the SEC. They also don’t have to file regular financial statements.

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.

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.

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.

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.

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.

All companies are either private or public. As we’ve discussed, private companies are owned either by an individual or a small group of owners. They can’t issue public shares and aren’t subject to registration and reporting requirements with the SEC.

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.

More options for business structures

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.

In most cases, only high-net-worth individuals and organizations have the opportunity to invest in venture capital and private equity because the initial investment amount is often very high.

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.

U.S. Small Business Administration. " Sole Proprietorship ."
U.S. Small Business Administration. " Choose a Business Structure ."
U.S. Small Business Administration. " Business Structures - Limited Liability ."
Internal Revenue Service. " Limited Liability Company (LLC) ."
U.S. Small Business Administration. " Corporation ."
U.S. Small Business Administration. " S Corporation ."
U.S. Securities and Exchange Commission. " Should My Company 'Go Public'? "
Harvard Business School. " How to Get Into Private Equity ."
Privately owned by one or more individuals
Venture capital, private equity, and other private investment, bank borrowing
Publicly traded shares through an IPO, bonds
Not subject to registration and public reporting and disclosure requirements
Subject to registration and public reporting and disclosure requirements
Sole proprietorship, partnership, LLC, or corporation

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