The world of business is full of jargon and technical terms that can be confusing for those who are new to it. One of the most fundamental concepts to understand is the difference between publicly and privately held companies. While these two types of companies may seem similar at first glance, they have some significant differences that can have a big impact on the way they operate.
In this article, we’ll explore the key differences between publicly and privately held companies. We’ll look at their ownership structures, regulatory requirements, financial reporting, and more. By the end of this article, you’ll have a better understanding of these two types of companies and how they differ.
Private vs. Public Company
The main difference between publicly and privately held companies is their ownership structure. Publicly held companies are owned by shareholders who have bought shares of the company’s stock on the open market. These shares are traded on stock exchanges like the New York Stock Exchange (NYSE) or the NASDAQ. Anyone can buy shares of a publicly held company, and the company may have thousands or even millions of shareholders.
Privately held companies, on the other hand, are owned by a small group of individuals or organizations. These owners are usually the founders of the company, its management team, or a group of private investors. Unlike publicly held companies, shares of a privately held company are not traded on stock exchanges. Instead, they are bought and sold privately, often through a network of brokers or other intermediaries.
Another key difference between publicly and privately held companies is their regulatory requirements. Publicly held companies are subject to a range of regulations and reporting requirements that are designed to protect investors and ensure that the company is operating in a transparent and ethical manner. These regulations include:
- Securities and Exchange Commission (SEC) reporting requirements
- Sarbanes-Oxley Act requirements for financial reporting and internal controls
- Public company accounting oversight board (PCAOB) audits
Privately held companies, on the other hand, are not subject to the same level of regulation. While they still have to comply with certain laws and regulations, they have more flexibility in how they operate and report their financials.
One of the most significant differences between publicly and privately held companies is their financial reporting requirements. Publicly held companies are required to file regular reports with the SEC that disclose detailed financial information, including revenue, expenses, profits, and losses. These reports are available to the public and are used by investors to evaluate the company’s performance.
Privately held companies, on the other hand, are not required to file the same level of financial reports. While they may still have to prepare financial statements for tax or regulatory purposes, they are not required to disclose as much information about their financial performance as publicly held companies.
In addition to the differences we’ve already discussed, there are several other ways in which publicly and privately held companies differ:
- Publicly held companies tend to be larger than privately held companies, as they have access to more capital and can raise funds by selling shares on the open market.
- Publicly held companies are more likely to have a board of directors that oversees the company’s management team, while privately held companies may be run more informally.
- Publicly held companies may be more focused on short-term performance, as their stock price is subject to the whims of the market, while privately held companies may be more focused on long-term growth and sustainability.
Are publicly held companies always larger than privately held companies?
Not necessarily. While many of the largest companies in the world are publicly held, there are also many smaller companies that are publicly held.
Can privately held companies go public?
Yes, privately held companies can go public by issuing an initial public offering (IPO). However, going public can be a complex and expensive process, and it may not be the right choice for every company.
Do publicly held companies have more legal liability than privately held companies?
Yes, publicly held companies may have greater legal liability than privately held companies, as they are subject to greater regulatory oversight and must meet stricter accounting and auditing standards.
In summary, the difference between publicly and privately held companies lies primarily in the ownership structure, regulatory requirements, and financial reporting. Each type of company has its own advantages and disadvantages, and businesses must carefully consider their options when choosing which structure to use.