Definition
A public company is a corporation whose shares are traded publicly on a stock exchange and must disclose financial information to the public. On the other hand, a private company is owned by a non-governmental organization or a relatively small number of shareholders with its shares not traded on the public market and its financial information not available to the public. The main distinction lies in ownership, transparency of financial information, and availability of shares to the public.
Key Takeaways
- Ownership: A public company’s shares are traded publicly on the stock market, and therefore the ownership is dispersed among the general public. A private company, on the other hand, is owned by its founder(s), management or a group of private investors.
- Disclosure of Information: Public companies are required to disclose their financial statements to the public in accordance with the rules of the Securities and Exchange Commission (SEC). Private companies do not have to disclose their financial information publicly, and their financial information is only available to their shareholders and certain government organizations.
- Regulatory Oversight: Public companies are subject to much more regulatory oversight than private companies. This is primarily because they have a responsibility to their shareholders to provide accurate and timely information, whereas private companies do not have this level of duty to the public.
Importance
The finance terms “Public Company” and “Private Company” are essential for understanding the nature and structure of a business, its ownership, accountability and financial disclosure mechanisms.
A public company is owned by shareholders and its shares are publicly traded on a stock exchange, making it subject to stricter regulations and financial transparency for shareholder protection.
Private companies, however, are solely owned by a group of private individuals or entities and do not need to disclose financial information publicly.
Consequently, they have fewer regulatory burdens.
The distinction between these two underpins their funding strategies, the level of risk investors may be exposed to, and the overall operational and financial decision-making process within the company.
Explanation
Public and private companies are two distinct types of business entities which are distinguished by the method they use to offer shares of the company. A public company, also known as a publicly traded company, is a corporation whose shares are traded publicly on one or more stock exchanges. The main purpose of a public company is to raise funds for business growth and expansion.
They generally have a large number of shareholders and are subject to regulations and transparency requirements that provide a much larger degree of financial transparency. This makes them more attractive to institutional and individual investors as they need to disclose regular financial reports to enhance their accountability and credibility. On the other hand, a private company is owned by its founders, management, or a group of private investors and its shares don’t trade on public exchanges.
The main purpose of private companies is to operate their businesses and increase their worth without the pressure of market expectations and shareholder requirements as present in public companies. Private companies have fewer rules and regulations to adhere to, and their owners have a much more direct influence on the business, allowing for faster decision-making. However, accessing capital to grow can be more challenging as they can’t sell shares to the general public.
Examples of Public Company vs Private Company
Amazon vs. Cargill: Amazon is an example of a public company. It is listed on the NASDAQ and its shares can be purchased by any investor. Many corporate actions, such as board appointments, executive pay, and quarterly financials have to be disclosed publicly. This results in greater transparency but also greater scrutiny from the public and the government. Conversely, Cargill is an example of a private company. It has been owned by the Cargill family since its founding in
Its financials are only disclosed to shareholders and there’s less public scrutiny into its operations.
Coca Cola vs. Mars: Coca Cola, the beverage manufacturer, is publicly traded on the New York Stock Exchange (NYSE) meaning its shares can be bought and sold by the general public and its business operations and financial information are open to public scrutiny. On the other hand, Mars Inc., the confectionery and pet food conglomerate, is an entirely private enterprise and, despite being one of the largest privately held companies in the world, it does not have to disclose much of its internal workings or financial information to the public.
Facebook vs. IKEA: Facebook, a major tech company known globally, is publicly listed and trades on the NASDAQ. Due to its public company status, it must adhere to SEC regulations and follow strict reporting standards to provide transparency to shareholders. IKEA, on the other hand, is largely a private company, owned by the Kamprad family via their foundation. As a private company, IKEA has more flexibility to make decisions without the pressure of short-term profitability and public scrutiny, allowing for more long-term strategic decision-making.
FAQs: Public Company vs Private Company
What is a Public Company?
A Public Company, also known as a publicly-traded company, is a company whose shares are traded on the open market, such as a stock exchange. Public companies are owned by the shareholders who own the publicly traded shares.
What is a Private Company?
A Private Company is a company that is not traded on any stock exchange. These companies are typically owned by a small group of investors, which can include its founders, management, or a group of private investors.
What are the key differences between Public and Private companies?
Public and Private Companies differ primarily in their ownership structure and their accessibility to capital. Public Companies often have thousands or even millions of different shareholders and can raise capital by selling additional shares. Private Companies, however, are typically owned by a small group of individuals and have fewer ways to raise capital.
Why would a company choose to go public?
A company might choose to go public to raise capital for expansion, to increase its profile and credibility, or to provide liquidity to its owners and employees. However, this comes with additional costs and regulations.
Why might a company choose to stay private?
A company might opt to stay private to maintain control with a smaller group of shareholders, to avoid the costs and regulations associated with being a public company, or to maintain privacy around its financials and operations.
Related Entrepreneurship Terms
- Shares and Ownership
- Disclosure of Information
- Stock Market Listing
- Shareholder Expectations
- Funding and Profit Distribution
Sources for More Information
- Investopedia – A comprehensive source of finance and investment-related terms, with highly detailed articles.
- Business Insider – Offers news and commentary about business and related topics.
- Harvard Business Review (HBR) – Provides deep insight from experts in the field of business and finance.
- Forbes – Known for original articles on finance, industry, investing, and marketing topics.
