What is a Private Company?

A private company is one that is held under private ownership, in other words, it is not held under public ownership. This means that if the company has stock, it is not publicly traded, and those stocks are not issued under an Initial Public Offering (IPO). In the US, there are less stringent requirements on private companies to disclose their financial information; public companies must meet strict criteria set out by the Securities and Exchange Commission (SEC).

All companies must file a financial return and set of financial statements, but the differences in disclosure are dependent on the size of the company, and less so the nature of its holding.

Key Learning Points

  • A private company is held under private ownership and its shares are not publicly traded
  • All companies are required under US GAAP and IFRS to file a financial return and set of financial statements
  • An Initial Public Offering (IPO) is where previously privately held shares are sold for the first time to the public
  • Private companies may go public to raise additional capital to sustain growth

Types of Private Company

There are multiple types of private company, often differentiated by size. These could be sole traders (also called sole proprietorships in the US), partnerships, companies limited by guarantee or limited liability companies, which are all common on both sides of the Atlantic. In the US there are two additional types of private companies – S corporations and C corporations. S corps are allowed no more than 100 shareholders and are not taxed on their profits, while C corps are allowed an unlimited number of shareholders, but are taxed double on their profits.

A sole proprietorship is a company that has one sole owner; depending on the jurisdiction, the proprietorship is not its own legal entity, and instead the assets, liabilities, obligations, risks and rewards belong to the individual owner.

Partnerships are similar to sole traders in that the owners share complete ownership and liability for the performance of the business, but there must be at least two owners.

Limited Liability Companies (LLCs) are a hybrid of a company and a partnership, where multiple partners share the liabilities associated with the entity. In the US, different states have different operating and reporting requirements for LLCs, but most have no restrictions on who can be a partner.

Advantages and Disadvantages of a Private Company

The main advantages of a private company are the quick set-up processes and low costs of incorporation, along with the ability to maintain total control among the existing shareholders. Many companies stay in private ownership in order to remain family companies. An example of this in the UK is the newspaper company, Telegraph Media Group, which is owned by the Barclay family, whose other holdings have included the Ritz Hotel. The group is now held by the second generation of the Barclay family, as control was passed to the children of the original owners.

Becoming a public company involves significant costs and time for the IPO process, which can be offputting to some, and not always reap the rewards that are hoped for. The history of stock markets are littered with companies whose initial share price has never recovered from the IPO after poor performance, or the company having to lay bare infrastructure or organizational problems that otherwise would have remained more private. Recent examples of failed IPOs include Uber; although the company raised $8.1bn from its IPO, it had a target fundraiser of $100bn, and its stock price has never got close to the original offer price again.

There are more disadvantages of going public in the US, as public companies are required to make more disclosures than private companies, including annual 10-K reports, quarterly 10-Q reports, and reports on major events (8-K reports). In the UK the reports required are more detailed than for a private company, and quarterly updates are required to be issued to the stock market.