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.
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.
Public companies may also sell bonds on the stock market. Bonds are like loans that companies get from investors, and you can learn more about them in our guide to the stock market.
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.
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.
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.