How Private and Public Companies Differ

To the outside observer, it may be difficult to discern whether a company is public or private unless it’s one of the publicly traded giants like Amazon or Walmart. The differences relate primarily to ownership, where the funding comes from, the regulations that must be followed and the level of scrutiny the company will be under. The typical transition is from a private company to a public one. Transitioning a company in the other direction is also possible, although it happens less frequently. The following are characteristics of public and private companies.

Ownership

A private company owns all of its stock, which is held by a small group of investors. They can decide when and to whom shares are sold and set their own price. A public company has offered its stock shares to the open market and is therefore available for purchase by anyone. The market determines the selling price of public shares and is based on supply and demand. Because the stock is regularly bought and sold via the stock exchange, the company ownership changes continually.

The goal of many entrepreneurs is to give birth to a unicorn business, which means starting a small private company, growing it quickly and then selling it to an investor for a billion dollars. While this type of progression to such a significant market value is rare, it does happen. It is not uncommon, however, to see private companies being sold at a price point in the millions.

Funding

Since a private company is owned by a small number of individual investors or venture capitalists, to grow the business, this handful of owners must provide any additional capital needed for expansion. On the other hand, a public company reaches out to the marketplace for an infusion of cash when it makes its shares available for purchase.

Regulation

The difference between private and public companies concerning regulations is significant. A public company is subject to stringent SEC regulations and reporting requirements, and its shares must be registered. Private companies, on the other hand, aren’t subject to these regulations until their annual revenue reaches ten million dollars or their stock is held by more than five hundred investors.

Control

Both types of companies must have a board of directors, hold an annual meeting where the minutes are carefully recorded, and maintain a roster of shareholders that includes the number of shares they own. A private company has a limited number of investors and is mostly free from regulations until they reach a specific size, and as a result, are free from public scrutiny regarding their business decisions. However, a public company, because its stock is sold on the open market, is subject to much closer oversight and analysis. When they hold their annual meeting, anyone who owns at least one stock share is welcome to attend. Even the press is welcome.

Transition

A public company can go private, although it is much less common than the other way around and can become very complicated because of the number of owners. When a private company has reached a point in its growth where further expansion will require a more significant investment, they may decide to take it public and sell its shares on the open market as a way to raise capital. This begins with an initial public offering (IPO) of stock. The transition process can be very complicated, take many years to complete, and become quite expensive. It can also redirect management’s attention away from the company’s daily operations.

Private companies can be large or small, while public companies are generally large, but the two also differ in many other significant ways. A private company has relatively few owners, so it experiences very little interference in its business activities. A public company, however, can have thousands of owners, is under careful scrutiny and must adhere to a long list of regulations. In general, the public and private companies differ in ownership, funding and regulation.