4. What is the distinction between a “private company” and “public company”?
A private company is a business whose ownership interest is not openly held or traded by the public at large. Company ownership is not sold in the public market. As such, all ownership interests are acquired via personal transactions with the company or other owners of the company. A public company, on the other hand, is a business whose ownership is openly traded in the market. Often, the ownership interest will be traded on a public “stock exchange”. If the shares are not listed on an exchange, the shares are generally available for purchase through securities brokers in what is known as “over-the-counter” transactions. Public companies are subject to far more extensive regulation than private companies. This reality often leads public companies to repurchase outstanding shares from the public market in a transaction known as “going private”.
• Note: Most public companies are corporations. There are, however, limited instances where shares of ownership in other types of entities are sold publicly. An example would be master limited partnership interests.
• Discussion: Why do you think that public and private companies are subject to different levels of regulation?
• Practice Question: Stock of ABC Corp is traded on a public exchange. Milly makes a tender offer to shareholders and acquires all of the outstanding shares of ABC. At this point, is ABC Corp a public or privately held company?