When starting a business, one major decision is whether it will be a public or private company. To understand the difference, let’s explore these two types of companies using simple terms and relatable examples.
What Is a Private Company?
A private company is owned by a select group of people. This could include the founders, a small group of investors, or even family members. These companies don’t sell their shares to the public on a stock exchange.
Example: Imagine a family-run bakery called “Sweet Treats.” The ownership is limited to family members, and they don’t invite the public to buy shares in their business. This is a private company.
Key Features of Private Companies:
- Ownership: Restricted to a small group.
- No Public Stock: Shares aren’t available on the stock market.
- Regulations: Fewer reporting requirements compared to public companies.
- Decision-Making: Often more straightforward due to fewer stakeholders.
What Is a Public Company?
A public company, on the other hand, sells its shares to the general public through a stock exchange. This means anyone can buy a piece of the company if they can afford the shares.
Example: Think of Apple Inc. When you buy Apple’s stock, you become a part-owner of the company, even if it’s just a tiny fraction.
Key Features of Public Companies:
- Ownership: Shares are held by a wide range of people, including individual and institutional investors.
- Public Stock: Shares are traded openly on stock exchanges.
- Regulations: Strict reporting requirements, like filing financial statements with regulatory bodies.
- Decision-Making: More complex, as decisions must consider shareholders’ interests.
Differences Between Public and Private Companies
| Feature | Private Company | Public Company |
|---|---|---|
| Ownership | Limited to a few individuals or entities | Wide range of public investors |
| Stock Availability | Not traded on stock exchanges | Traded openly on stock exchanges |
| Regulations | Less stringent reporting requirements | Must comply with strict regulations (e.g., SEC filings) |
| Fundraising | Relies on private investments | Can raise capital through public stock offerings |
| Transparency | Financial details are often private | Must disclose financial performance publicly |
Why Do Companies Go Public?
Companies usually decide to “go public” (via an Initial Public Offering or IPO) to raise more money. This money can help them grow, launch new products, or pay off debt. However, going public comes with more scrutiny, stricter regulations, and the need to please shareholders.
Example:
Imagine “Sweet Treats” growing into a nationwide chain. The family decides they need significant funds to expand internationally. By going public, they can sell shares to raise the needed capital, but they’ll have to deal with public scrutiny and more regulations.
Why Stay Private?
Staying private can offer more control and less regulatory burden. Companies that prefer to keep their operations confidential or have sufficient funding from private investors often choose to stay private.
Example:
“Sweet Treats” might stay private if the family values control over the business and prefers not to share financial information publicly.
Real-World Examples
- Private Company: Mars, Inc. (the candy maker) is a family-owned business and a private company.
- Public Company: Coca-Cola is publicly traded, allowing anyone to buy shares and own a piece of the company.
Conclusion
The choice between being a private or public company depends on the goals, resources, and preferences of the business owners. Private companies enjoy more privacy and control, while public companies have greater access to capital but face more regulations and accountability.
Next time you hear about a company going public or staying private, you’ll know exactly what it means!
Photo by Binyamin Mellish: https://www.pexels.com/photo/silver-macbook-on-wooden-table-in-front-black-chair-386150/