What Is Privately Owned?
A privately-owned company is a company that is not publicly traded. This means that the company either does not have a share structure through which it raises capital or that shares of the company are being held and traded without using an exchange. Privately-owned companies include family-owned businesses, sole proprietorships, and the vast majority of small and medium-sized companies.
- A privately-owned company does not have a share structure through which it raises capital, or its shares are being held and traded without using an exchange.
- Privately-owned companies include family-owned businesses, sole proprietorships, and the vast majority of small and medium-sized companies.
- Unlike a public company, a privately-owned company does not have to answer to public investors.
These companies are often too small to conduct an initial public offering (IPO) and tend to fulfill their financing needs using personal savings, inherited money, and/or loans from banks. Although many small businesses fit the definition of a privately-owned company, the term privately-owned is most often used to refer to companies that are large enough to be publicly traded but are still being held in private hands.
The shares of privately-owned companies are more challenging to sell due to the uncertain nature of their real value and the lack of an exchange that supports transparency and liquidity.
How a Privately-Owned Company Works
Privately-owned companies are far more common than publicly-traded companies. Privately-owned companies may be owned by an individual, a family, a small group, or even hundreds of private investors or venture capitalists.
Companies that were once publicly traded can also be made private again through a leveraged buyout (LBO). In 2016, for example, the ride-sharing company Uber had over seven million common shares outstanding and 11 million preferred shares held by a large number of venture capitalists. The Securities and Exchange Act of 1934 states that the total number of shareholders generally should not exceed 500. Crowdfunding and the trend of technology companies staying for longer in the venture capital phase have raised questions about whether this shareholder limit should be increased.
Privately-owned companies are also referred to as being privately-held.
Privately-Owned vs. Publicly-Traded
A privately-owned business may be contrasted with a publicly-traded company. A publicly-traded company is a corporation owned by multiple public shareholders. The shares of public company stock are traded on an exchange. These companies are considered “public” since shareholders, who become equity owners of the company, can be composed of anybody who purchases stock in the company. Although a small percentage of shares are initially floated to the public, daily trading in the market determines the value of the entire company.
A privately-owned business may “go public” through an initial public offering (IPO). This process means that shares of the company’s stock are issued to the public in a brand new stock issuance. An IPO can be a useful tool to raise capital from public investors. Some companies may have private shareholders prior to going public, in which case the private-share ownership may be converted to public ownership.
Prior to its IPO, the company will select an underwriter and choose an exchange where the shares will be issued and then traded publicly. The underwriters market the proposed share issuance in order to estimate market demand and establish a final offering price. A board of directors that consists of members both internal and external to the organization must be formed prior to the IPO date. The board is a governing body that meets at regular intervals to set policies for corporate management and oversight.
Additionally, the company must meet requirements set forth by the exchange listing and the Securities and Exchange Commission (SEC). This includes filing a Form S-1 registration statement with the SEC. The registration statement includes information on the planned use of capital proceeds, details of the business model and competition, a brief prospectus of the planned security, and the methodology used to calculate the offering price.
Advantages and Disadvantages of Being Privately-Owned
IPOs are an incredible tool for raising a large amount of capital to fund the growth of a business and cash out early investors. That said, there are many reasons why a company may choose to remain privately-owned. First, being a public company comes with an added layer of scrutiny. Public companies are required by the Securities and Exchange Commission (SEC) to issue shareholder reports that comply with Generally Accepted Accounting Principles (GAAP).
Privately-owned companies should still keep their books in shape and regularly report to their shareholders, but there are usually no immediate legal implications of late reporting or not reporting at all. Most privately-owned companies still use GAAP because it is considered the gold standard in accounting practice. In addition, most financial institutions will require annual GAAP compliant financial statements as a part of their debt covenants when issuing business loans. Therefore, although it’s not required, privately held companies tend to use GAAP.
Privately-owned companies can use corporate structures that public companies can’t, setting terms for investors that wouldn’t be allowed in the public market. In some ways, privately-owned companies have more freedom than public companies that must answer to a larger audience.