Understanding Private Companies: Ownership, Types, and Characteristics

What Is a Private Company?

A private company is a business owned by private individuals or groups rather than the public. It can issue stock, but not through public exchanges. It also faces fewer regulatory requirements compared to public companies. Private companies often take forms like sole proprietorships, partnerships, or limited liability companies (LLCs). Being private offers advantages like less regulation and greater control for owners, but it can also make raising capital more challenging. Examples range from small family-owned businesses to large influential companies like Cargill or Koch Industries.

Understanding How Private Companies Operate

Private companies are sometimes referred to as privately held companies. They range from millions of small businesses in the U.S. to dozens of unicorn startups worldwide. Private companies have different rules for shareholders, members, and taxation. In 2024, U.S. firms such as Cargill and Koch Industries, with large annual revenues, fall under the private company umbrella.

Remaining a private company can make raising money difficult. This is why many large private firms choose to go public through an IPO. While private companies access bank loans and certain equity funding, public companies can often sell shares or raise money through bond offerings.

Exploring Different Types of Private Companies

• Sole Proprietorship: This is an unincorporated business that puts company ownership in the hands of one person. A sole proprietorship is not a separate legal entity. Its assets, liabilities, and financial obligations fall completely onto the individual owner. While this gives the individual total control over decisions, it also raises risk. The owner of the company files no corporate taxes. Rather, they report business income and expenses on their personal income tax returns.
• Partnerships: These businesses have at least two owners. Partnerships share the unlimited liability aspect of sole proprietorships.
• Limited Liability Company (LLC): This business often has multiple owners who share ownership and liability. A limited liability company (LLC) merges some of the benefits of partnerships and corporations, including pass-through income taxation and limited liability without having to incorporate.LLCs provide owners with protection against personal liability and regulations for LLCs vary by state.
• "S" and "C" Corporations: S corporations and C corporations are similar to public companies with shareholders. However, these companies can remain private and do not submit quarterly or annual financial reports. S corporations can have no more than 100 shareholders and are not taxed on profits. C corporations can have unlimited shareholders but are subject to double taxation.

Pros and Cons of Being a Private Company

Companies often stay private due to high costs and strict regulations. Remaining private helps companies save on IPO costs, avoid paperwork like financial statements, and not disclose their progress to the public.

Private ownership allows company owners, especially in family-run businesses, to keep more control. Koch Industries has remained in the Koch family since its founding in 1940. While there are advantages to being private, these companies may struggle to raise capital. Unlike public companies, private entities don't trade on public stock exchanges.

Owners may be liable for their private company's financial health. When a private company faces financial difficulties, the owner may be held responsible for debt and other financial obligations. This can harm the owner's credit scores, especially if the company defaults.

Comparing Private Companies and Public Companies

Unlike private companies, public entities abide by the rules outlined by financial regulators, such as the SEC. This means they must be fully transparent and file paperwork at regular intervals. These documents include quarterly and annual reports, proxy statements, changes in beneficial ownership, and income statements.