What is a 'Private Company'
A private company is a company with private ownership. As a result, it does not need to meet the Securities and Exchange Commission's (SEC) strict filing requirements for public companies. Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges and are not issued through an initial public offering (IPO). In general, the shares of these businesses are less liquid and the values are difficult to determine.
BREAKING DOWN 'Private Company'
There are four main types of private companies: sole proprietorships, limited liability corporations, S corporations or C corporations. All of these types of private companies have different rules for shareholders, members and taxation.
Sole proprietorships put ownership of the company in the hands of one person. While this gives the one owner total control over decisions, it also makes it harder to raise money. Limited liability corporations often have multiple owners who share ownership and liability. There are fewer documents required for opening this type of private company.
S Corporations and C corporations are similar to public companies with shareholders. These private companies do not have to submit quarterly or annual financial reports. S corporations can have no more than 100 shareholders. C corporations can have an unlimited number of shareholders.
Remaining a private company can make raising money more difficult. Public companies can often sell shares or raise money through bond offerings with more ease. Private companies do have access to bank loans and certain types of equity funding, depending on the type of corporation.
Why Companies Stay Private
The high costs of undertaking an IPO is one reason why many smaller companies stay private. Public companies also have to publicly release financial statements and other filings on a regular schedule. These filings include annual reports (10-K), quarterly reports (10-Q), major events (8-K) and proxy statements.
Another reason why companies stay private is to maintain family ownership. Many of the largest private companies today have been owned by the same families for multiple generations. Staying private means the company does not have to answer to its shareholders or choose different members for the board of directors. Some family-owned companies have gone public, and many maintain family ownership and control through a dual-class share structure, meaning family-owned shares have more voting rights.
Going public is a final step for private companies. An IPO costs money and takes time for the company to set up. Fees associated with going public include an SEC registration fee, Financial Industry Regulatory Authority (FINRA) filing fee, a stock exchange listing fee and money paid to the underwriters of the offering.