When it comes to setting up a business, key decisions have to be made on ownership and management structure. Two widely known forms of business structures are public and private companies. However, not everyone understands the differences between the two types of corporations. In this article, we will explore in detail the important features that differentiate a public and private company.
A public company is a company whose shares are available to the general public to purchase on a stock exchange. Public companies must comply with stringent regulations, including regular financial reporting and disclosure requirements, as well as requirements related to corporate governance. On the other hand, a private company is a business entity owned by a limited number of shareholders. Its shares are not available to the public for purchase, and therefore it does not have the same regulatory requirements as a public company.
The fundamental difference between public companies and private companies is the issue of ownership. Public companies are owned by shareholders who buy and sell shares on an open market, whereas private companies are owned by a small group of individuals.
In a public company, anyone that buys shares can have a financial stake in the company. This means that the owners of the company have limited control of the business since they have to satisfy the interests of a large number of shareholders. The large number of shareholders creates a situation where the ownership is highly dispersed, making it challenging to influence the company’s direction.
In contrast, private companies have a limited number of shareholders, which may be a single person. In private companies, the owners have more control over the business since they hold most or all of the shares. In most cases, private companies are owned by families, individuals, or closely held groups. This makes decision-making easier, as there are fewer people to consult, and the ownership structure is more centralized.
Another important difference between public and private companies is the sources of financing. Public companies raise capital from the public by selling shares on stock exchanges. Through initial public offerings (IPOs), public companies can raise large amounts of capital.
Private companies, on the other hand, do not have the same level of access to capital as public companies. Since their shares are not available to the public for purchase, private companies often have to rely on their own resources or external financing from banks or venture capitalists. Private companies do have the option of going public through an IPO, but this comes with significant regulatory requirements, which may not be desirable or feasible.
As mentioned earlier, public companies are required to meet stringent regulations related to financial reporting and disclosure, as well as corporate governance. Regular reporting ensures that investors are aware of the company’s financial health and what it plans to do in the future. The disclosure requirements of public companies serve to ensure that investors are protected from fraudulent practices, insider trading or misleading information.
Private companies, on the other hand, are not subject to the same level of regulatory requirements as public companies. They must still follow certain regulations, such as employment laws, tax regulations, and industry-specific rules. However, since their shares are not traded on public markets, disclosure and reporting requirements are not as strict, making it easier for private companies to keep their information confidential.
Corporate governance refers to the internal structure and processes that govern the relationship between the company’s managers, directors, and shareholders. In public companies, corporate governance structures are well-defined to protect the interests of shareholders and ensure transparency and accountability.
Public companies are typically required to have a board of directors, which represents shareholders and oversees the company's management. Board members are expected to act in the best interest of the company and its shareholders. Moreover, public companies have audit committees to ensure that financial reporting is accurate and reliable.
In contrast, private companies have more flexibility when it comes to corporate governance structures. This is because they are not subject to the same regulations as public companies. Private companies are not required to have a formal board of directors or audit committee. Instead, they can choose to create a customized governance structure that aligns with their goals and values.
One of the major benefits of being a private company is the ability to maintain confidentiality regarding financial information and internal operations. This is because private companies are not required to disclose the same level of information as public companies.
Public companies are required to disclose their finances, plans, and operations to the public and their shareholders regularly. This means that their information is open to anyone who wishes to evaluate it, including competitors. In contrast, private companies can keep their finances, internal operations, and strategic plans confidential, thereby protecting their competitive advantage.
In summary, the key differences between public and private companies are the ownership structure, sources of financing, regulations, corporate governance, and confidentiality. Public companies are owned by a large number of shareholders, require stringent regulations, and have well-defined corporate governance structures, while private companies have a limited number of shareholders, fewer regulations and more flexible governance structures. Ultimately, the choice between a public and private company depends on personal circumstances, goals, and preference.