A company is a type of business entity wherein a separate legal entity is formed and incorporated to run the business of the entity, with the goal of earning profits for its members. All companies have shareholders who are part owners of the company. These shareholders are one of the sources of funds for the company as well are entitled to share of profits of the company.
This article looks at meaning of and differences between two types of companies based on the number and type of shareholders – private and public company.
Definitions and explanations
Private company:
A private company is a company whose shares are not held by the general public at large but generally by a limited set of members. The ownership of such a company is thus private i.e., generally, promoter-founder group or top management comprise a large part of the shareholders. Private company is also termed as ‘closely held’ company.
Shares of a private company cannot be listed on any stock exchange to be traded amongst the general public. Exchanges of shares of a private company thus happens off the market in private transactions.
Most companies will start out as private companies. As the scale of their business operations increase and they require more extensive public funding, they can convert into public companies by complying with all statutory requirements so that they can approach the public for funds.
Public company:
A public company is a company whose shares are held by the general public at large. A public company is thus also termed as ‘publicly held’ company.
The shares of a public company can be freely traded across the stock exchange in which they are listed. Shares of a public company are first traded through an Initial Public Offering (IPO) that is made to the public at large through any registered stock exchange.
Public companies generally do not have a limitation on the number of members it can have with one member being able to hold as little as one share. As public companies involve public money, they are subject to more stringent regulation by the Securities and Exchange Commission (SEC).
Public companies are more beneficial when the company’s operations warrant raising extensive funding that may not be possible through internal sources or through lenders.
Differences between private company and public company:
The differences between private company and public company have been detailed below:
1. Meaning
- A private company is a company who is owned by a limited set of private members and whose shares are not available to the general public at large.
- A public company is a company whose shares are offered to and traded by the general public at large.
2. Ownership
- The ownership of a private company is generally limited to fewer members – typically the promoter-founder group or the top management persons.
- The ownership of a public company is offered to the general public and thus it generally has a larger number of members.
3. Listing on stock exchange
- Shares of a private company cannot be listed nor traded on any stock exchange.
- Shares of a public company can be listed and traded on any stock exchange.
4. Trading of shares
- The shares of a private company are traded off the market via private transactions. Since the number of members are generally fewer, the trading of shares is at lower volumes and less frequent.
- The shares of a public company are traded on the stock exchanges generally at much larger volumes. Shares are often traded frequently for some companies even daily.
5. Liquidity
- Shares of a private company are less liquid than those of public companies as they are traded through negotiated transactions off the market.
- The shares of a public company enjoy good liquidity as they are freely traded on the stock market.
6. Source of funds
- In the case of private companies, the sources of funds are limited to internally generated funds or borrowings from external sources such as banks and other financial institutions.
- Additionally, public companies can source funds from the public at large – either through public offering of shares or through raising of public debt.
7. Disclosure of financial information
- Private companies are not required to report and disclose their financial information to persons other than their stakeholders.
- Public companies have to mandatorily report and disclose detailed financial information to the general public.
8. Reporting compliances
- Private companies involve private money of few individuals thus they have less stringent reporting compliances as compared to public companies.
- As public companies involve money of the general public (through either shares or bonds or both) they are required to comply with stringent reporting compliances. They have to periodically submit various financial reports to the SEC.
9. Preferred
- Private companies are preferred by promoter run and family run businesses that do not wish to dilute their control by offloading shares to the general public. For this same reason, companies that can raise sufficient funding through internal means or through bank channels may choose to remain as private companies.
- Public companies are primarily opted for when large scale funding is required which can only be accessed through a public offering.
Public company vs private company – tabular comparison
A tabular comparison of public company and private company is given below:
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| Meaning | ||||
| Owned by a limited number of members and the shares are not offered to general public | Owned by general public, shares are owned and traded by general public | |||
| Ownership | ||||
| Ownership rests with a limited number of members which usually include promoters/founders and top management etc. | Ownership consists of a much larger number of members as a large portion of ownership is offered to the general public. | |||
| Listing on stock exchange | ||||
| No listing and trading of shares on any stock exchange | Shares are listed and traded on one or more stock exchanges | |||
| Trading of shares | ||||
| Trading of shares is done off the market and is usually less frequent and at lower volume | Trading of shares is done on the market (i.e., stock exchange) which is usually much frequent and at a much larger volume. | |||
| Liquidity | ||||
| Investment in shares is less liquid | Investment in shares is relatively more liquid | |||
| Source of funds | ||||
| Limited to internal funding and borrowing from financial institutions and/or banks. | Funds can be raised through offering shares or debt instruments to general public at a much larger scale | |||
| Disclosure of financial information | ||||
| Reporting of financial information is required to primary stakeholders only and not to general public | Reporting of financial information to general public is mandatory under law | |||
| Reporting compliances | ||||
| Reporting requirements are less stringent | Reporting requirements are more stringent | |||
| Preferred | ||||
| Preferred in situations where promoters or founders want to keep the control with them only | Preferred in situations where lager funds are needed, and for which public offering is the best solution | |||
Conclusion – private company vs public company:
Though the sources of funding for private companies are limited when compared to public companies, this is not necessarily indicative of the scale of operations of the company. There are several private companies that operated at the same or larger scale than public companies. While conversion of private company to public company is more commonly seen when companies wish to upscale their operations, but conversion of a public company back to a private company is not unheard of. Public companies who wish to regain ownership control can buy back their public shares and delist themselves from the stock exchange, returning back to becoming private companies.
