What Is a Private Company?
A private company is a firm held under private ownership. Private companies may issue stock and have shareholders, but their shares are not issued through an initial public offering (IPO) and do not trade on public exchanges. As a result, private firms donot need to meet the Securities and Exchange Commission's (SEC) strict filing requirements for public companies. The shares of these businesses are generally less liquid, and their valuations are more difficult to determine.
Key Takeaways
- A private company is a firm that is privately owned.
- Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges and are not issued through an IPO.
- The high costs of an IPO is one reason companies choose to stay private.
- Sole proprietorships, LLCs, S corporations, and C corporations are types of private companies.
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How Private Companies Work
Private companies are sometimes referred to as privately held companies. All operating companies in the U.S.start as privately held companies. They can range in size and scope, encompassingthe millions of individually owned businesses in the U.S.andthe dozens ofunicorn startups worldwide. Even U.S. firms such as Cargill and Koch Industries, with upwards of $100 billion in annual revenue, fall under the private company umbrella.
Remaininga private company can make raising money more difficult. This is why many large private firms eventually choose to go public through an IPO. While private companies do have access to bank loans and certain types of equity funding, public companies can often sell shares or raise money through bond offerings with more ease.
There are four main types of private companies in the United States:
- Sole proprietorships
- Limited liability corporations (LLCs)
- S corporations (S-corps)
- C corporations (C-corps)
Each has different rules for shareholders, members, and taxation, which are explained in the next section.
Types of Private Companies
As noted above, there are four different types of private companies. We explain each of them in a little more detail below.
Sole Proprietorship
A sole proprietorship is an unincorporated business. it puts company ownershipin the hands of one person. This type of company is not a separate legal entity. Rather, its assets, liabilities, and all of its financial obligations fall completely onto the individual owner. While this gives the individualtotal control over decisions, it also raises risk and makes it harder to raise money.
Many small businesses fall under this category. But there is no government protection or oversight. The owner of the company files no corporate taxes. Rather, they report business income and expenses on their personal income tax returns.
Limited Liability Company (LLC)
A limited liability company (LLC)often has multiple owners who share ownership and liability. This ownership structure merges some of the benefits of partnerships and corporations, including pass-through income taxation and limited liability without having to incorporate.
LLCs provide owners with protection against personal liability. This means that any owners are shielded from being held personally responsible for company debts and liabilities. The regulations for LLCs vary by state.
S and C Corporations
S corporations and C corporations are similar to public companies with shareholders. However, these types of companies can remain private and do not need to submit quarterly or annual financial reports.
The number of shareholders allowed for each and their respective tax rules differ:
- S corporations can have no more than 100 shareholders and are not taxed on their profits
- C corporations can have an unlimited number of shareholders but are subject to double taxation
Partnershipsare anothertype of ownership structure for private companies; theyshare the unlimited liability aspect of sole proprietorships but include at least two owners.
Advantages and Disadvantages of Private Companies
Advantages
High costs and strict regulations are two reasons why companies often choose to remain private. Doing so allows companies to:
- Keep costs down, such as those related to an IPO
- Avoid time-consuming, costly, and burdensome paperwork like financial statements, such as annual reports (10-K), quarterly reports (10-Q), major events (8-K), and proxy statements
- Avoid having to disclose details on company progress and spending to regulators and the public
Being private means that company owners can retain more control. They aren't required to answer to investors, shareholders, the public, government officials, and financial regulators. This is especially true for family-run companies. Many large private companies are or have been owned by the same families for years. For instance, Koch Industries has remained in the Koch family since its founding in 1940.
Staying private means a company does not have to answer to its public 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 can have more voting rights.
Disadvantages
Although there are many advantages to remaining private, there are some drawbacks. For one thing, raising capital can be difficult. Unlike public companies, private entities don't trade on public stock exchanges. This means that they can't issue and sell new stock to the general public, which is a step that many public companies take to raise money and help them grow.
Owners may be liable for the financial well-being of their private companies. This means that if a company struggles and goes through difficult times, the owner(s) may be held responsible for debt and other financial obligations. This can negatively impact the owner owners' credit scores—especially if the company defaults.
The future of a company may be clouded if multiple partners are involved and have different visions. There may be problems in the decision-making process and partners may face conflicts if they can't agree with each other.
Pros
Avoid high costs of going public
Avoid regulatory paperwork and hurdles
No need for public disclosure
Retain control
No need to answer to investors, financial regulators, government officials, and the public
Cons
Raising capital may be difficult
Financial liability falls on owner(s)
Potential for disagreements and conflicts among partners
Private vs. Public Companies
Public companies are the opposite of private companies. Ownership of public companies is divided into shares, which are sold to the public. This is first done through an IPO. Once that is complete, the shares of a public company are sold on the secondary market through stock exchanges. Equity in a public company can be held by insiders (those working within the company) and outside investors.
Unlike private companies, public entities are required to abide by the rules outlined by financial regulators, such as the SEC. This means they must be fully transparent and file paperwork at regular intervals. These documents include (but aren't limited to) quarterly and annual reports, proxy statements, changes in beneficial ownership, and income statements.
Other differences between private and public companies include:
- Access to capital markets to raise money
- Voting rights on company issues for shareholders
- Being subjected to public scrutiny
| Key Differences Between Private and Public Companies | |
|---|---|
| Private Company | Public Company |
| Private ownership | Ownership divided among shareholders |
| Not subject to regulation | Subject to financial regulation |
| No need to file disclosures and statements | Must regularly file disclosures and financial statements |
| Not subject to public scrutiny | Subject to public scrutiny |
| No access to capital markets | Can access capital markets |
Examples of Private Companies
Private companies range in size from small businesses to large corporations. The small mom-and-pop convenience store or dry cleaner in your neighborhood may be a private company. Many mid-sized and large corporations are also privately held. Some of the most popular large private companies include:
- Koch Industries
- Cargill
- Deloitte
- IKEA
- Ernst & Young
X (formerly Twitter) was public until Elon Musk bought it and took the company private in October 2022.
Who Owns a Private Company?
Private companies are owned by their shareholders. This may include the owner(s), the company's management, and any other people who have a stake in the company. Unlike private companies, ownership isn't divided into shares that trade on a stock exchange and isn't diluted.
What's the Difference Between a C Corporation and an S Corporation?
C and S corporations are two types of private companies. The difference between these two entities lies in how they are taxed. A C corporation files a corporate tax return and pays federal income tax at the corporate rate. An S corporation, on the other hand, is treated as a pass-through entity. This means they do not file a federal income tax return. Instead, the corporation's profits and losses are reported on the shareholders' returns and are taxed at individual tax rates.
What Are the Benefits and Drawbacks of Remaining a Private Company?
Companies remain private for several reasons. This helps keep control of the company within the owner, founder, and/or family's hands. Doing business as a private company also means avoiding the high cost of going public, avoiding scrutiny from the public and the government, and avoiding the need to file paperwork with financial regulators.
But, operating as a private company comes with certain disadvantages. Private companies cannot access capital markets to fund growth or pay their debts. Owners may find themselves financially liable during times of distress and may face conflicts if there are disagreements between multiple shareholders.
The Bottom Line
Many of the world's largest companies are private. Some of the most well-known corporations that fall into this category include IKEA, Ernst & Young, and X. Being private means that the company's owner(s) retain control and aren't subject to scrutiny from regulators. But, it also means that they can't raise money through capital markets to fund their growth or pay their debts. As such, you're out of luck if you want to invest in a private company as their shares aren't available for purchase by the general public.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
Library of Congress. "U.S. Private Companies."
Forbes. "America's Largest Private Companies."
U.S. Small Business Administration. "Choose a Business Structure."
U.S. Securities and Exchange Commission. "Exchange Act Reporting and Registration."
Securities Exchange Commission. "Ex-99.3 4 Dex993.html Summary of Koch Industries History,"
The New York Times. "Elon Musk Completes $44 Billion Deal to Own Twitter."
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