Public vs. Private Companies: Key Differences

When exploring the world of business, understanding the distinctions between public and private companies is essential for investors, entrepreneurs, and anyone interested in how organizations operate. At first glance, the difference may seem straightforward: public companies are listed on stock exchanges and private companies are not. However, the reality is more nuanced, with each type of company following unique rules, ownership structures and reporting requirements. Let’s explore the differences and what you need to know.

For help building a personal investment portfolio, consider working with a financial advisor.

Public vs. Private Company Basics

When exploring the world of business, it’s important to understand the fundamental differences between public and private companies. These distinctions affect everything from how a company raises money to the level of transparency required by law. Whether you’re considering investing, starting a business or simply want to be more informed, knowing the basics of public versus private companies can help you make smarter financial decisions.

Public Company – General Ownership

A public company is defined as one that offers shares of stock for sale to all investors. Anyone who can legally trade securities in the United States can own shares of stock in a public company. These companies generally list their stock on open exchanges like the New York Stock Exchange or the NASDAQ, where investors can freely buy and sell shares among themselves. Anyone from an individual investor to a major institution can trade these shares.

Private Company – Restricted Ownership

A private company is defined as one that does not offer shares of stock for sale to the general public. In some cases, a privately held company will not have formal shares of stock. A company like this may simply have an ownership split among its founders or other initial owners. For example, three people may found a company together and agree that each simply owns one-third of the business.

In other cases, the company will have formal stock that represents proportional ownership, just like a public company. However, it can only sell those shares to accredited and institutional investors, like venture capital firms. It cannot accept money from members of the general public.

Public vs. Private Companies: Key Differences

A public vs. a private company is defined by who can invest and the rules that apply to each. If the general public can buy shares of stock, it’s a public company. Otherwise, it’s a private company. In practice, this leads to a few critical differences in how these two types of companies operate.

Who Can Invest

As noted above, only accredited and institutional investors can buy shares of stock in a private company. By contrast, anyone can buy shares of stock in a public firm.

Regulatory Oversight

One of the most significant differences between public and private companies lies in their regulatory obligations. Public companies must comply with rigorous reporting standards set by government agencies like the Securities and Exchange Commission (SEC). This includes quarterly and annual financial reports, disclosures about executive compensation and other material information.

Private firms have far less oversight because they can only accept money from accredited and institutional investors. If you are wealthy enough to invest in a private company, the government feels that you’re capable of taking care of yourself (or at least better able to absorb the losses of a scam or a bad business). However, the SEC begins to apply some regulatory oversight once a private company has more than 500 investors.

Disclosure Requirements

Part of the regulations that govern a publicly traded company is that it is required to disclose its finances and business operations to the public at large. A company must issue a full financial disclosure when it first offers publicly traded stock in an initial public offering, every three months thereafter (quarterly reports) and every year (annual 10-K reports).

Private companies have few disclosure requirements. They may not lie or defraud their investors, but otherwise, each investor is responsible for doing their due diligence. Again, this is because only wealthier and more experienced investors are allowed to buy shares of private stock.

Which One Should You Choose?

Deciding between a public or private company structure depends on your business goals, need for capital and desired level of privacy. Public companies benefit from increased visibility and access to funding, but must adhere to strict regulations and public scrutiny. Private companies enjoy more operational freedom and privacy, but may face limitations in raising funds. Understanding these basics can help you determine which path aligns best with your financial objectives and risk tolerance.

Why Go Public?

Running a public company tends to be more difficult and expensive than a private company. You answer to a much larger group of shareholders, and it usually takes a lot of work from the lawyers and accountants to keep on top of the SEC’s regulations, plus applicable state regulations.

The upside, though, is access to capital. No private market can beat the public stock exchanges for sheer size. When a company goes public, it can raise a massive amount of money through its IPO process. It can also raise more money by releasing new stock in the future. In theory, there’s no formal limit on how big a private company can get. In practice, if you want to keep growing, eventually you’ll need access to the kind of money only public markets can bring.

Why Stay Private?

It is much easier to run a private company. Privately held firms have far fewer stakeholders to answer to. Unlike a public company, a private company will have no outside investors or just a relative few. Even when they do sell shares to institutional investors, private companies sometimes only sell non-voting shares that entitle the investor to a share of profits but not a say in running the business.

In addition, private companies don’t have to follow most SEC oversight regulations. This makes it much easier and less expensive to run the business because they don’t have to stay on top of the large number of rules put in place to protect public investors.

However, private companies can’t access the kind of capital that public companies can. What’s more, many private investors buy into a firm specifically because they expect it will issue an IPO. They anticipate making their money back by selling their shares of stock once the company goes public. As a result, many private firms eventually need to go public both to continue growing and to reward their initial investors.

Bottom Line

Understanding the distinctions between public and private companies is essential for anyone interested in the business world, whether you’re an investor, entrepreneur or simply curious about how organizations operate. Public companies are traded on stock exchanges and must adhere to strict regulatory and reporting requirements, offering transparency to shareholders and the public. In contrast, private companies are owned by a smaller group of investors and enjoy greater flexibility and privacy, with fewer disclosure obligations. These differences impact everything from how companies raise capital to their governance structures and growth strategies.

Investing Tips

A financial advisor can help you build a portfolio that works for you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Funding for a private company can be a pretty complicated world. Some of the biggest players in this area are called private equity firms. They’re very rich and equally interesting.