What Is a Private Company? How Private Companies Work

A private company is a business entity owned by a private group of owners. Its ownership group can issue stock to private investors, but that stock is not available to the general public. Private companies are not listed on a stock market and are not subject to regulation by the U.S. Securities and Exchange Commission (SEC).

There are five types of private companies in the United States.

1. 1. Sole proprietorship: A company owned by a single person who assumes unlimited liability for the company's financial and legal obligations.
2. 2. Partnership: A company owned by a small group of partners who, as with a sole proprietorship, assume unlimited liability for their company.
3. 3. Limited liability company (LLC): Limited liability companies allow sole proprietors or partners to own a company while letting the company stand as its own legal entity that shares liabilities with the owners.
4. 4. S-corporation: Like a publicly traded company, an S-corp can sell shares to owners outside its management group. An S-corp can have no more than 100 investors, and it must have a board of directors that submits annual reports to government agencies.
5. 5. C-corporation: A C-corp can have an unlimited number of shareholders. Most of America's largest private companies are C-corporations. Small businesses thinking of going public may convert to a C-corp before filing their initial public offering (IPO).

Private firms distinguish themselves from their publicly traded counterparts in a number of ways.

1. 1. Small size: Most small businesses are private companies with relatively small valuations and few employees.
2. 2. Limited ownership: Private companies like an LLC or an S-corp tend to have very few owners. Any ownership stock is limited to private markets.
3. 3. Less financial transparency: While publicly traded companies must issue public financial statements, private company data can remain the privileged property of its owners.

From an ownership perspective, a private company offers several notable benefits.

1. 1. Flexible decision-making: A sole proprietorship, partnership, or LLC does not have to answer to a board of directors or groups of shareholders. This lets company executives make decisive choices on their own.
2. 2. Simplicity: Private companies are not legally obligated to prepare and disseminate financial information the way that public companies are. They also have simpler tax structures.
3. 3. Consistency of vision: Public companies must adjust course depending on the will of their shareholders. Private companies can stay true to the founder's vision without interference from activist investors.

Small business owners may encounter the downsides of running a private company.

1. 1. Limited access to capital: Private companies may have a hard time summoning the large sums of cash that public companies can get from an IPO. Instead, they can seek out private equity investors or venture capitalists to provide injections of cash.
2. 2. Legal liabilities for owners: Some private companies, particularly sole proprietorships and partnerships, leave their owners legally exposed should the companies encounter financial or legal problems in the course of business.

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