Difference between Private and Public Companies

January 19, 2017 by Editorial Team

For decades, private and public companies have been emerging across countries. While both offer products or services to their end consumer, they greatly differ in a number of ways. This article will shed some light on their differences.

Definitions

Private Companies vs Public Companies

Private companies can be sole proprietorships, partnerships, limited liability companies, or corporations that are privately owned and traded. In most instances, the company’s founder, a group of private investors, or a management group is entitled to its full ownership.

Private companies are legally required to follow compliance laws for shareholders. Also, they must pass legal documents to their state. However, they are not obligated to publicly disclose any financial reports.

Meanwhile, public companies enable the public to own a portion of a company’s stock through an initial public offering (IPO). Mainly used by private companies that are seeking expansion, an IPO refers to the first time a stock of a private company is offered to the public.

When a company is publicly held, it is run and managed by a board of directors. Because the company’s shares are publicly offered in the stock market, financial reports must be disclosed to the public.

Private Companies vs Public Companies

So what’s the difference between private and public companies? While both aim for profitability and growth, there are marked differences between the two.

The shareholders of a private company are mainly involved in the overall management and operations of the company. Since the founders are typically also the shareholders of the company, it is easier to align the goals of the management and the shareholders. Public companies, however, need to consider their external investors before making any decisions. Aside from getting approval for the management’s actions, public companies also need to disclose their financial performance and other business-related information to their external investors.

Private companies must have a minimum of 2 members and a maximum of 50. Meanwhile, the members of public companies are not limited to any number as long as they are run by a minimum of 7 members.

Since private companies are smaller, their operational cost is lower. Nonetheless, they face greater risks because they have limited resources. From an analyst’s point of view, the smaller the company is, the lower its chances for potential growth and expansion. Likewise, since a private company’s funds are limited, the return on investment (ROI) is usually slower. Public companies, on the other hand, can gain access to more funds and resources since they can sell bonds and stocks for project expansion. However, since public companies are bigger, they have higher operational costs. Plus, the cost of compliance for being publicly enlisted to the stock market is high.

Lastly, private companies do not need to disclose their financial information to the public, while public companies do. Also, public companies must strictly comply with their state’s laws and regulations.

Comparison Chart

Private CompanyPublic Company
Minimum members: 2Minimum members: 7
Maximum members: 50Maximum members: None
Privately ownedPublicly owned
The company’s shareholders and management make business-related decisionsBusiness-related decisions must be made upon the approval of external investors
Public disclosure of financial information is not necessaryPublic disclosure of financial information is necessary
Limited funds and resourcesFunds and resources are easier to access
Lower operational costsHigher operational costs