What is Privately Owned?
Privately owned refers to a company that is not publicly traded. This means that the company either does not have a share structure through which it raises capital or that shares of the company are being held and traded without using an exchange. Privately-owned companies include family-owned businesses, sole proprietorships, and the vast majority of small and medium-sized companies.
These companies are often too small to bother with an initial public offering (IPO) and tend to fulfill their financing needs from personal savings, family, and retail banks. Although these smaller businesses fit the definition of a privately owned company, the term is most often used to refer to companies that are large enough to be publicly traded but are still being held in private hands.
The shares of privately-owned companies are more challenging to sell due to the uncertain nature of their real value and the lack of exchange to support transparency and liquidity.
Understanding Privately Owned
Privately owned companies are far more common than publicly traded ones. Privately-owned companies may be owned by an individual, a family, a small group, or even hundreds of private investors, as happens with large private investors.
- Many privately-owned companies don't feel the need to raise capital through an IPO.
- Some privately-owned companies have revenues in the tens or hundreds of billions.
- Privately-owned companies with billions of dollars can essentially self-finance future growth.
- A privately owned company does not answer to public investors, unlike an IPO.
- Privately-owned companies may offer stock options but do not trade on public exchanges.
Companies that were once publicly traded can also be taken private again through leveraged buyouts. In 2016, for example, the ride-sharing company Uber had over 7 million common shares outstanding and 11 million preferred shares held by a large number of venture capitalists. The Securities and Exchange Act of 1934 states that the total number of shareholders generally should not exceed 500. Crowdfunding and the trend of tech companies staying in the venture capital phase longer have raised questions on whether this shareholder limit should be increased.
Privately owned companies are also referred to as being privately held.
IPOs are an incredible tool for raising a large amount of capital to fund the growth of a business and cash out early investors. That said, there are many reasons why a company may choose to remain privately owned. For one, being a public company comes with an added layer of scrutiny, as companies are required to issue shareholder reports that comply with Generally Accepted Accounting Principles.
Privately-owned companies should still keep their books in shape and regularly report to their shareholders, but there are usually no immediate legal implications of late reporting or not reporting at all. In addition, privately-owned companies can use corporate structures that public companies can't, setting terms for investors that wouldn't be allowed in the public market. In some ways, privately-owned companies have more freedom than IPOs that must answer to a larger audience.