Public vs. Private Companies


Public vs. Private Companies


At some point in our lives, we’ve all been inspired by success stories. Usually, the hero of these stories starts from the bottom with close to nothing – then, boom! It takes one brilliant idea, a single streak of luck or one convinced person to pave the way for success.

Like our heroes, most businesses start off small. With the help of innovation, customer loyalty, and a great deal of perseverance, these businesses continue to grow and flourish. When growth is promising, these companies start to attract investors. With growth comes expansion; and with expansion comes requirements for necessary funding.

There comes a point when the owners of these businesses start to ask the inevitable question: “Should we go public or not?

Let’s talk about public vs. private companies. So what does it mean to go public and how does it compare to being privately held?

Investor Academy - public vs. private companies

What Are Private Companies?

Let’s start off with private companies. A private company can either be a corporation, a limited liability company, a partnership or a sole proprietorship whose stocks are held privately and are not publicly traded. Generally, these companies are owned by their founders, private individuals, the management or a group of private investors.

Since the ownership of private companies is often limited to a number of individuals or investors, the capital infusion could also be limited to what the owners can contribute, too. Bummer? Not quite.

While, generally, there are often limited growth and expansion opportunities when a company remains private, there are a few large multinational private companies that have stood through the test of time. These include our favorite candy-snack-and-pet-food-maker Mars and our go-to home and furniture shop Ikea.

The major pro of remaining private is that management retains full autonomy in business decisions. Perfect for control freaks out there! Just kidding.

What Are Public Companies?

By now, you should have already learned what an initial public offering (IPO) is. Basically, an IPO is the first time a company offers its stocks for issuance to the public. An IPO occurs when a company “goes public”. After the IPO, a portion of the company’s ownership is now turned over to the stockholders, the parties who have purchased the stocks during an IPO.

At this point, the company is considered public. Being public is not a walk in the park. A huge change of management will occur when a company transitions from being privately held to being public, especially since major business decisions must be consulted and aligned with the shareholders first.

In addition, public companies are subjected by the Securities and Exchange Commission (SEC); the government agency tasked to regulate the securities industry, to its stringent laws, regulations, rules and procedural guidance.

The major pro of going public is that companies get access to further capital through offering the sale of their stocks to the public. Also, when a company is publicly owned, the corporation will be driven to increase its stockholder value. Simply put, stocks that increase in value will encourage investors to retain their stocks instead of selling them. Win-win for the company and its stockholders!