Private Company – Definition

Cite this article as:"Private Company – Definition," in The Business Professor, updated April 8, 2019, last accessed October 21, 2020, https://thebusinessprofessor.com/lesson/private-company-definition/.

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Private Company Definition

A private company is a privately-owned business whose stocks are not traded on the public exchange and are not issued through an initial public offering. The shares of a private company are offered, owned and traded privately or over the counter. As the stocks of a private company are not listed on a public exchange, these companies do not need to comply with the filing requirements of the Securities and Exchange Commission (SEC). These businesses are usually less liquid, and It is often more difficult to estimate the valuation of such companies.

A private company may also refer to the companies which are not owned and controlled by the government. However, in most of the native English-speaking countries including the United States and the United Kingdom the former meaning is much more prevalent in the current economic situation.

A Little More on What is a Private Company

Private companies are also known as Privately held company, close corporation, closely-held corporation or unlisted corporation.

Depending on its ownership there can be four types of private company- sole proprietorships, limited liability corporations, S corporations, and C corporations. The rule for shareholders, members and taxations are different for each type.

The scope and size of the private companies can be of a vast range. Many of the private companies are owned and operated by the company’s founders, their families and a small group of investors. The shares of these companies are held by the founders, their friends, families, angel investors, and employees. Millions of individually owned businesses in the U.S. are private companies.

Private companies are not necessarily small business. Some world-famous companies of the U.S including Deloitte, PricewaterhouseCoopers, Ikea, and Dell are private companies.

In the United States, all the companies start as a private company and eventually they go public to raise funds. Raising money often becomes an issue for the privately held companies so after a point many big private companies start offering shares in public through IPO. Private companies are however entitled to receive bank loan and certain types of equity funds.

Types of private companies

Private companies owned by one single individual is known as Sole proprietorships. The owner controls the entire company and its operations. The individual owner is responsible for all its assets, liabilities and financial obligations. A higher degree of risks is attached to these companies and as a result, the fundraising becomes difficult.

Another ownership structure of a private company is the partnership business. Partnership companies are owned by two or more individuals. The liability aspect is similar to the proprietorship business.

Limited Liability companies are owned by multiple owners and the ownership and liability is shared among them. The owners of limited liability companies are not personally liable for the company’s financial obligations or liabilities. Limited Liability companies have the characteristics of both corporations and partnership companies. The feature of limited Liability is similar to the corporations, at the same time the limited liability companies enjoys the flow-through income taxation which is a feature of the partnership company.

S Corporation and C corporations are owned by its shareholders, but they are allowed to remain private. They do not trade their shares on public exchanges, thus are not required to submit annual financial reports. S corporations are not allowed to have more than 100 shareholders and are taxed as a partnership business. The income can be passed directly to the shareholders for avoiding double taxation. The C corporations can have any number of shareholders, but they are subject to double taxation.

Reasons for remaining private

Many family-owned privately held companies prefer to stay private to maintain family control. Some of the largest private companies in the U.S. are owned by a family for generation and they are not ready to go public and lose control. They do not want to involve other people in the decision-making process of the company. Sometimes the family-owned businesses go public but maintain the family control by issuing dual-class share.

Many small companies remain private to avoid the costly process of Initial Public Offering. Once gone public, the companies also need to fulfill the SEC requirements including periodical public disclosure of financial statement.

The process of going public involves money and time. A company needs to pay SEC registration fee, Financial Industry Regulatory Authority fee and a stock exchange listing fee. They also need to pay the underwriters of the offering. Many private companies take time to be prepared for going public in a later stage.

Companies also stay private to avoid disclosing their financial details to their competitors. In the initial stage, it may matter a lot for small companies. They may not want their competitors to know every detail about their company’s margin, pricing, profitability, and financial structure before they get a strong hold on the market.

Key differences between Public Company and Private Company

As already discussed, private companies do not have to adhere to the SEC regulations and filing requirements while public companies need to follow those rules.

The performance of public companies is always under the scrutiny of the public. The general public and the press have access to their financial reports. The general public and the press have access to their financial reports. Anyone who holds the stocks of the company is allowed to attend the annual meetings of a public company whereas the private company’s annual meetings are much more private. They do not have to reveal their performance in public. The decision-making process is easier and fast in private companies.

The value of each share of a public company is known to all. It is much easier to trade the stocks of public companies. The assets of a private company are much more illiquid. It is often difficult to sell the shares of a private company. Determining the valuation of a private company is also difficult as the information is not available in public.

A Public company may also decide to go private. In this situation, a company acquires all the outstanding stocks. It generally involves the cash-out of all or almost all of the company’s public shares. They withdraw their shares from the public exchange and deregister from the SEC.

Reference for Private Company

Academic research on Private Company

Governmentally Appointed Directors in a Private Corporation: The Communications Satellite Act of 1962, Schwartz, H. (1965). Harvard Law Review, 79(2), 350-364. This paper analyzes the Communication Satellite Act of 1962 and discusses whether the government can effectively overcome the challenge of “monopoly” by appointing directors in private corporations.

Public responsibility in the private corporation, Andrews, K. R. (1972). The Journal of Industrial Economics, 135-145. This paper deals with the question of the private firm’s engagement in public responsibilities in the developing nations. It presents a typology of four strategies describing how this can be done successfully. The paper uses 30 case studies to develop this typology. The challenges and their possible solutions are also discussed for each of these strategies. The paper suggests an appropriate strategic program for public responsibilities can be beneficial for both the company and the community it is working in.

The modern corporation and private property: a reappraisal, Hessen, R. (1983). The Journal of Law and Economics, 26(2), 273-289. This article attempts to reassess the highly acclaimed book of the 1930s, The Modern Corporation, and Private Property written by Adolf Berle and Gardiner Means. The book is considered to be a phenomenal work on the “separation of ownership from control of the modern corporation and its consequences”. This essay looks into the book from the perspective of Gardiner Means. This essay also discusses how Means articulated the theory in later days, and it compares the later career path of Mean with that of Barle.

Private actors and public governance beyond the state: the multinational corporation, the Financial Stability Board, and the global governance order, Backer, L. C. (2011). Indiana Journal of Global Legal Studies, 18(2), 751-802. This paper argues in the twenty-first century’s global economic scene some extraordinary and complex governance systems are developing outside the state and international public organizations. Transnational corporations are in the center of these new evolving systems. These systems may lead towards a new template for networked governance beyond the state, although public and private actors are integrated stakeholders in this. This paper seeks to explore the possibilities of detecting this new template for transnational governance. It attempts to find whether public governance in the twenty-first century is adopting the characteristics of transnational corporate governance.

Private Corporation: Its Constitutional Genesis, Robbins, J. J. (1939). Geo. LJ, 28, 165. This paper explores the roots of Private Corporation in the constitution of the United States.

The effects of “going private” using private equity: The newly private corporation and the dimensions of corporate performance, Schneider, M., & Valenti, A. (2010). Business and Society Review, 115(1), 75-106. This paper develops a model on the performance implications of a public corporation going private by using private equity. It uses insights from corporate social responsibility and stakeholder theories in developing the model. Agency theory is also considered in this model. The paper shows that when a public corporation goes private it is more likely for them to put more emphasis on the corporate financial performance and less on corporate social performance. It suggests this negative effect on corporate social performance can be moderated by several variables including the company’s capitalization, its exit strategy after going public and the discretion of the managers.

The Status of a Private Corporation Organized under an Unconstitutional Statute, Field, O. P. (1928). Cal. L. Rev., 17, 327. This article studies the cases presented before the courts where a private corporation is organized under an unconstitutional statute This article seeks to determine the status of such private corporations by looking into these court cases. It tries to find out whether it is a corporation de jure or de facto or it is a nullity.

Public Corporation as Private Constitution, Palmiter, A. R. (2009). This article draws the parallel between the US corporate governance and the US political governance and argues that the governance of large publicly traded corporations in the US is largely influenced by the republican form of government of the US both in their structures and metaphoric languages. It suggests that one is required to understand and appreciate the structures if the US political governance in order to comprehend the US corporate governance.

Ultra Vires Contracts of a Private Corporation, McDonough, H. (1929). U. Det. Bi-Monthly L. Rev., 13, 10. This article analyzes the Ultra Vires Acts of Private corporations. It divides the Ultra Vires contracts into four classes: (i) Wholly executory on both sides, (ii) Fully executed on both sides, (iii) Fully executed by only one side and not by the other, and (iv) Partially executed on one or both sides.

Elementary discussion on the connection of labour and capital of private corporation in our country [J], Meng-yun, S. O. N. G. (2006). Technological Development of Enterprise, 10, 021. This paper analyzes the relationship between labor and capital of private corporations in China. The paper argues for establishing a healthy, stable and harmonious connection of labor and capital. The paper suggests this can be done from some aspects that include forming a labor union, strengthening the function of the union, amending labor law towards perfection, promoting the system of collective negotiation and collective contract and introducing personnel’s prompting mechanism using modern prompting theory.

Valuation of minority stockholder’s interest in a closely-held private corporation, Webb, S. C., & Haydon, R. B. (1995). Journal of Forensic Economics, 8(3), 261-271. In a closely-held private corporation, the minority shareholders practically have no control over the management of the corporation. This paper attempts to evaluate the interest of the minority shareholders in such corporations.

Problems and Countermeasures on the Development of the Private Corporation in China [J], Lijun, Z. (2005). Journal of Beijing Vocational & Technical Institute of Industry, 2, 031. This paper attempts to find a way to develop private corporations in China. It investigates the actuality, status, and effect of the private corporations to find the way of the development.

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