What Is a Public Company?
A public company is a corporation whose ownership is distributed amongst general public shareholders via the free trade of shares of stock on exchanges or over-the-counter markets. Although a small percentage of shares are initially floated to the public, daily trading in the market determines the value of the entire company.
It is considered to be "public" since shareholders, who become equity owners of the company, maybe composed of anybody who purchases stock in the firm.
Understanding a Public Company
Public companies are publicly traded within the open market, and a variety of investors buy the shares. Most public companies were once private companies that, after meeting all regulatory requirements, opted to become public to raise capital. Examples of public companies include Chevron Corporation, F5 Networks, Inc., Google LLC, and Proctor & Gamble Company.
The US Securities and Exchange Commission (SEC) states that any company in the United States with over 500 shareholders and more than $10 million in assets must register with the SEC and adhere to its reporting standards and regulations.
Advantages and Disadvantages of Public Companies
Public companies have certain inherent advantages over private companies. Public companies sell future equity stakes and increase access to debt markets. Once a company goes public, additional offerings generate revenue through the creation and sale of new shares in the marketplace.
Yet, with these advantages comes increased regulatory scrutiny and less control for majority owners and company founders. Public companies must meet mandatory reporting standards regulated by government entities. Additionally, applicable shareholders are entitled to documents and notifications on business activities.
Once a company is public, however, it must answer to its shareholders. For example, shareholders vote on certain corporate structure changes and amendments. Shareholders can vote with their dollars by bidding up the company to a premium valuation or selling it at a level below its intrinsic value.
- A public company issues shares through an IPO and trades on at least one stock exchange.
- Most private companies go public to raise capital.
- Many public companies go private to gain more control over the company and its decisions.
Public Company Reporting and Disclosure Requirements
The U.S. Securities and Exchange Commission (SEC) sets stringent reporting requirements for public companies. These requirements include the public disclosure of financial statements and annual 10-K reports outlining the state of the company.
The reporting requirements ensure that public companies adhere to all rules established by the Sarbanes-Oxley Act, reforms designed to prevent fraudulent reporting, and as enforced by the SEC. Each stock exchange also has specific financial and reporting guidelines that govern whether a stock is listed for trading.
From Public to Private
In situations where a public company no longer wishes to operate within that business model, it can return to a privately held state by buying back all outstanding shares from current shareholders. Once the purchase is complete, the company will be delisted from its associated stock exchanges and return to private operations.