Private vs. Public Companies: 5 Key Differences

A private company is a business entity controlled 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. A private corporation that is organized as 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).

A public company is a business entity that allows the general public to own equity shares. These shares are traditionally sold on a stock exchange to brokers, traders, and investors. Major stock exchanges like the New York Stock Exchange and the NASDAQ contain thousands of publicly traded companies in which retail investors can buy stock.

Although most shares of a public corporation are bought and sold in public markets, this does not mean that individual shareholders control the company. Rather, shareholders may vote on a board of directors, which in turn hires an executive team to oversee the day-to-day business activities of the company.

The main differences between public and private companies relate to organizational structure and financial obligations.

1. 1. Private companies are generally smaller. Most small businesses are private companies with relatively small valuations and few employees. Public companies tend to be much larger with high valuations.
2. 2. Public companies must answer to shareholders. Big companies traded on the open market tend to be owned by many shareholders, with the highest number of shares usually parked in pension funds, mutual funds, and exchange-traded funds (ETFs). Corporate executives and board members must answer to these investors and work to keep the company's stock price high.
3. 3. Investors in private companies tend to be more involved. Private companies, which are not listed in public stock exchanges, get their cash from revenue and from venture capital and private equity firms. Many venture capitalists play an active role in the companies they fund. In this sense, their needs must be addressed much like those of shareholders in a public corporation.
4. 4. Public companies have more reporting requirements. Per the Securities Exchange Act of 1934 and subsequent legislation, public companies must regularly issue financial statements that reveal the overall health of the company. This transparency is good for investors in capital markets, but it comes at a certain expense to the company—both in terms of money and employee hours. Private companies are less transparent when it comes to financial reporting, and company data can remain the privileged property of its owners.

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