Public Companies vs. Private Companies: Key Differences to Know

Need to know the difference between public companies and private companies? Well, in a nutshell, a public company is one that’s traded on the stock market, while a private company isn’t.

Of course, there’s more to it than that. So in this guide, we’ll explain the big differences between private companies and public companies―and we’ll tell you why you’d want your business to choose one path over the other.

Private vs. public 101

Before we get into the implications of being a private company or a public company, let’s make sure you understand the core definitions of each.

Public companies

A public company sells company stock on the stock market. That means that the general public can buy shares, and therefore partial ownership, of the company. Because these shares get bought, sold, and traded on the stock market, you may also see a public company referred to as a publicly traded company. It’s the same thing.

In order to sell shares on the stock market, a public company must first have what’s called an initial public offering, more commonly called an IPO. That just means that it’s the first time that investors from the general public can buy company shares on the stock exchange.

Private companies

A private company is owned by founders and private investors. It doesn’t sell stock on the public market. Instead, all ownership is held by those founders and private investors (and sometimes a few other types of individuals)―which is why you might hear a private company called a privately held company.

As you can probably guess, that means that a private corporation usually won’t have had an IPO. (In some cases, a public company can choose to go private again.) Instead, it will stick to private fundraising, often through venture capital.

Pros and cons of public vs. private ownership

Now that you know what public and private companies are, let’s talk about what it actually means for businesses, and why you’d want to be one or the other.

To be clear, both public and private ownership have their advantages―which is why you’ll see both kinds of companies. Those advantages simply lie in different areas.

Capital

As we said above, a public company raises capital by selling stock on the public market. Note that they make money only off of stocks during an IPO or an FPO (follow-on public offering, in which they issue more stocks). When investors trade shares among themselves, the company does not earn cash.

Even so, public companies have more liquidity than private companies do, because they have the option to issue more shares. That can be a big advantage if a company has urgent cash flow needs.

Note that the amount a company earns from the stock exchange can vary widely. For example, Facebook raised $16 billion in its 2012 IPO.¹ But many companies (including Blue Apron) have rocky IPOs in which they end up selling shares for far less than they’d anticipated.

Private companies, however, don’t make money via the stock exchange. Instead, a private company raises capital through private investors, like venture capitalists and angel investors. These investors may receive shares of the company (equity) in exchange for their investments. Keep in mind, though, that these shares can’t be traded on the stock exchange.

It’s worth mentioning that a public company probably also raised capital from private investors prior to its IPO. In fact, venture capitalists often want to steer the companies they invest in toward an IPO so they can cash out their shares and get a big payout.

While private investors can offer a lot of cash, the stock exchange usually offers more potential capital. In other words, a publicly traded company can probably raise more capital than a privately held company. (This is why many people think that all big companies are public, though that’s not necessarily true.)

So when it comes to cold, hard cash, public companies usually have the advantage.

Control

When a public company sells shares on the public market, investors who buy those shares get a small amount of ownership in the company. That means that a public company becomes accountable to its shareholders.

This can take a very direct form. Shareholders may have voting rights (if they purchased common stock), which allows them to influence the direction of a company that way. It’s not always quite as direct, though. Not all shareholders have voting rights (they may receive dividends, or a share of company profits, instead).

Make no mistake, though: a public corporation still needs to please its shareholders. Otherwise, a shareholder might try to dump company stock, lowering the company’s overall valuation and making it harder to sell stock in the future. Put simply, most investors don’t want to buy into a struggling company.

For that reason, public companies always need to have their shareholders in mind, which can seriously affect the direction the company takes. It often leads to an emphasis on short-term profit rather than long-term strategy.

A private company, on the other hand, retains more control over its direction. Yes, it will still be accountable to the handful of investors that have private equity in the company. But since those investors are often decision-makers within the company anyway, it allows the company to self-govern more effectively.

As a result, private companies often have more ability to focus on long-term growth rather than quarterly profits. So if a business owner wants to maximize the amount of control they have, they’ll probably want to stick to a privately held company.

Accountability

As we mentioned above, public companies are accountable to their shareholders. But we don’t just mean that in the decision-making sense―public companies also have very real accountability requirements.

All public companies must register with the U.S. Securities and Exchange Commission (SEC). They must also file regular financial statements and disclosures, usually on a quarterly basis.

In other words, a public company’s finances are on the public record. And if it doesn’t keep up with SEC reporting requirements, a public company can get in big trouble.

A company under private ownership, however, doesn’t have to register with the SEC. Yes, its private investors will probably still want to see regular financial statements. But a private company does not have to disclose its financial information to the public.

To put it simply, if you want your company to be able to keep its secrets, you’ll need to keep it private―otherwise you’ll have to deal with SEC disclosure requirements.

FAQs about private and public companies

Is a private company better than a public company?

A private company isn’t necessarily better than a public company, just like a public company isn’t necessarily better than a private company. Which one is better really depends on a business’s needs and goals.

If a business wants to raise tons of money, it’s probably better to go public and take advantage of the stock market as a source of capital. But if a business is more interested in retaining self-control, then it makes more sense to stay private.

What’s the difference between the private and the public sector?

Despite how similar they sound, the public and private sectors have nothing to do with public and private companies. (Confusing, we know.)

The public sector refers to government agencies and the jobs therein. The private sector, on the other hand, refers to non-governmental businesses and organizations, plus the associated jobs.

What does a company need to do to go public?

The exact requirements to go public depend on the stock exchange you wish to sell stock on. The New York Stock Exchange (NYSE) has different requirements than NASDAQ does, for example.

Regardless, you’ll definitely want to consult with attorneys and financial experts before you even think seriously about going public. They’ll be able to guide your next steps, which will probably include these:

• Meet earnings requirements for the relevant stock exchange
• Have three years of auditing financial statements
• Register with the SEC
• Undergo SEC review
• Set share prices
• Start selling shares

As you can see, it doesn’t happen overnight. So if you suspect you’ll want to take your company public, you should start planning now.

The takeaway

Public and private companies have some notable differences in how they raise capital, who controls the company’s direction, and what kind of accountability requirements they have.

As a general rule, public companies have more capital-raising potential, but private companies retain more control over their operations. So you’ll want to carefully consider your company’s needs and your desires before you decide whether or not to go public.

Want to invest in some public companies? Check out our rankings of the best online stock brokers to get started.

Disclaimer

At Business.org, our research is meant to offer general product and service recommendations. We don’t guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.

Sources

1. Kiplinger, “The 25 Biggest U.S. IPOs of All Time”