Private Company

Private Company: Definition & An Overview

Updated on February 24, 2023 | 3 min. read

🌟 KEY TAKEAWAYS

A private company is not publicly traded.

Private companies have one or more owners.

Public companies have to meet more stringent regulations

Trade and corporate expansion created a number of issues that more conventional business models were unable to address. For instance, people formed partnerships as a result of a proprietorship form of business’s unlimited liability characteristic, but even this turned out to be both insufficient as well as unsafe.

At this time, the idea of a company began to take shape, with private companies being the earliest example.

Read on as we learn more about private companies.

What Is a Private Company?

A private company is similar to a public company because it can issue company stock and have shareholders. However, a private company is not traded on public stock exchanges. The company remains privately owned and managed. It does not have to follow Securities and Exchange Commission's (SEC) guidelines for annual business filings.

Types of Private Companies

There are different ways to structure private businesses. Each one has its own rules, limitations, and benefits. Private companies may also be called:

Limited companies
Limited partnerships
Commercial enterprise
Private entities

Sole Proprietorships

With a sole proprietorship, a single person owns the company. The business is not a separate legal entity from the owner. Instead, all of the responsibilities fall on that single individual, including:

Assets
Liabilities
Debts
Risks

The single owner has complete control over what happens with the sole proprietorship, but they also carry all of the burdens.

Business Partnerships

It's also possible for two or more people to own a private company together. In this case, the owners share the profits and burdens equally. They also have to work together to make business decisions, which may mean compromising.

Limited Liability Companies (LLCs)

LLCs usually have more than one owner, similar to a business partnership. However, an LLC is its own entity, separate from the owners. In the case of an LLC, the business partners take on less of the burden without needing to incorporate.

S Corporations and C Corporations

These types of private companies are most similar to publicly traded companies. They remain privately held and don't have to submit quarterly or annual reports to the SEC. Regulations limit S Corporations to 100 shareholders and C Corporations do not face a shareholder limit. S Corporations benefit from not facing profit taxes, but C Corporations face double taxation on profits.

Difference Between Private Companies and Public Companies

Private enterprises often have family ownership or joint venture ownership between business partners. Publicly traded companies are owned by shareholders. Some private companies have a board of directors, but the majority do not. Even without being publicly traded, they can still have private investors.

Government regulations require that public companies have a board of directors. Public companies, also called profit enterprises, may benefit from greater cash flow from stock market trading. However, they also have to follow strict securities industry rules.

Pros and Cons of Private Companies

Many companies choose to remain private businesses. An initial public offering (IPO) is very expensive. Family businesses often wish to stay private, too. When a private company becomes publicly traded, they face more stringent guidelines. Examples of documentation required for public companies includes:

Annual reports
Quarterly reports
Major events
Proxy statements

These requirements can cost business owners time and money. Remaining a private company means maintaining more control and facing fewer requirements.

Private ownership companies may face limitations to how much they can accomplish. But going public has benefits, too. Public shareholders often provide much-needed financial support to businesses.

Being a Shareholder with a Private Company

As a shareholder of a private company, you have three basic rights and responsibilities:

You have the right to access pertinent information.
You have the right to attend meetings and share your opinion
You have the right to vote on business decisions

Shareholders with publicly traded companies have these same rights and responsibilities. The difference is that privately-held companies usually have fewer shareholders. Each vote carries more weight for business decisions.

Summary

A private company is not publicly traded but can still have private shareholders. Private companies are not always small businesses and there are many global brands that are private. These companies have one or more owners. These owners benefit from more flexibility because there are fewer government regulations on private companies.