Difference Between Public & Private Companies

In general, many investors own the securities of a public company. This type of company sells stocks to the public and the stock is traded on an exchange. On the other hand, comparably few shareholders own the shares of a private company. This type of company does not sell stock to the public, and its stock is not traded on an exchange. Its stockholders are the principals of the company-its founders and family members, main employees and so forth. However, if a company has many shareholders, it is not necessarily a public company.

Public companies are important. They can easily raise capital, and use their securities as compensation for their employees, directors, and officers. Before the existence of the public company, it was very tough to raise large amounts of capital for private companies. Even though private companies can also issue securities as compensation for the services of their employees, recipients of the securities have difficulty while selling them on the open market. Securities from a public company are easier to sell, as they have an established fair market value.

This may be a disadvantage of private companies, but they do have many advantages. First, a private company is not required to disclose much information to the public. Its owners' wealth remains private. Much of the financial information that a public corporation shares is used by its competitors. Further, a public enterprise spends much more for certified public accountants. It needs to complete complicated paperwork, as required by government regulations.

When it comes to trends, the norm is for new businesses to start small and privately owned. After some years, if the private company is doing well and is promising, it may encounter an initial public offering that converts it to a public company, or it may encounter an acquisition by a public company.