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.
What Is a Private Company?
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.
How a Private Company Works
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.
How Do Private Companies Issue Stock?
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.
Disclosure and Reporting Requirements of Private Companies
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.
Private Company Examples
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).
Is a Private Company Better Than a Public 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).
What Is an 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).
What Are the Types of Private Companies?
When a person starts a company, they must choose from one of the following five legal business structures.
Sole proprietorship
Partnership
Limited liability corporation (LLC)
S-Corporation or C Corporation
Each business structure offers different protection of an owner’s assets (as well as various tax ramifications).
1. Sole Proprietorship
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.
2. Partnerships
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.
3. LLC
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.
4. S Corporations and C Corporations
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
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
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.
Advantages & Disadvantages of Private Companies
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.
Disadvantages of Private Companies
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.
Learn More About Public and Private Companies
For more information about the types of business structures in America, see:
