What Is a Private Company?

A private company is a firm held under private ownership. Private companies

may issue stock and have shareholders, but their shares do not trade on public
exchanges and are not issued through an initial public offering (IPO). As a result,
private firms do not need to meet the Securities and Exchange Commission's
(SEC) strict filing requirements for public companies. In general, the shares of
these businesses are less liquid, and their valuations are more difficult to
determine.

Volume 75%

1:34

Private Company

Understanding Private Company

Private companies are sometimes referred to as privately held companies. There
are four main types of private companies: sole proprietorships, limited liability
corporations, S corporations and C corporations—all of which have different rules
for shareholders, members and taxation.

All companies in the United States start as privately held companies. Private
companies range in size and scope, encompassing the millions of individually
owned businesses in the U.S. and the dozens of unicorn startups
worldwide. Even U.S. firms such as Cargill, Koch Industries, Deloitte and
PricewaterhouseCoopers with upwards of $25 billion in annual revenue fall under
the private company umbrella.

KEY TAKEAWAYS

 A private company is a firm that is privately owned.

 Private companies may issue stock and have shareholders, but their
shares do not trade on public exchanges and are not issued through an
initial public offering (IPO).
 The high costs of an IPO is one reason companies choose to stay private.
Remaining a private company, however, can make raising money more difficult,
which is why many large private firms eventually choose to go public through an
IPO. While private companies do have access to bank loans and certain types of
equity funding, public companies can often sell shares or raise money through
bond offerings with more ease.

The Main Types of Private Companies

Sole proprietorships put company ownership in the hands of one person. A sole
proprietorship is not its own legal entity; its assets, liabilities and all financial
obligations fall completely onto the individual owner. While this gives the
individual total control over decisions, it also raises risk and makes it harder to
raise money. Partnerships are another type of ownership structure for private
companies; they share the unlimited liability aspect of sole proprietorships but
include at least two owners.

Limited liability companies (LLCs) often have multiple owners who share
ownership and liability. This ownership structure merges some of the benefits of
partnerships and corporations, including pass-through income taxation and
limited liability without having to incorporate.

S Corporations and C corporations are similar to public companies with

shareholders. However, these types of companies can remain private and do not
need to submit quarterly or annual financial reports. S corporations can have no
more than 100 shareholders and are not taxed on their profits while C
corporations can have an unlimited number of shareholders but are subject to
double taxation.

Why Companies Stay Private

The high costs of undertaking an IPO is one reason why many smaller
companies stay private. Public companies also require more disclosure and must
publicly release financial statements and other filings on a regular schedule.
These filings include annual reports (10-K), quarterly reports (10-Q), major
events (8-K) and proxy statements.

Another reason why companies stay private is to maintain family ownership.

Many of the largest private companies today have been owned by the same
families for multiple generations, such as the aforementioned Koch Industries,
which has remained in the Koch family since its founding in 1940. Staying private
means a company does not have to answer to its public shareholders or choose
different members for the board of directors. Some family-owned companies
have gone public, and many maintain family ownership and control through
a dual-class share structure, meaning family-owned shares can have more voting
rights.

Going public is a final step for private companies. An IPO costs money and takes
time for the company to set up. Fees associated with going public include an
SEC registration fee, Financial Industry Regulatory Authority (FINRA) filing fee, a
stock exchange listing fee and money paid to the underwriters of the offering.

SPONSORED
Start with $30 trading bonus

Trade forex and CFDs on stock indices, commodities, stocks, metals and
energies with a licensed and regulated broker. For all clients who open their first
real account, XM offers a $30 trading bonus to test the XM products and services
without any initial deposit needed. Learn more about how you can trade over
1000 instruments on the XM MT4 and MT5 platforms from your PC and Mac, or
from a variety of mobile devices.