What is a private company?
A private company is a type of business organization that is owned by individuals or a small group of shareholders and is not publicly traded on a stock exchange. This means that the shares of the company are not available for purchase by the general public. Instead, they are held by a small group of shareholders, often including the founders and their families.
The concept of a private company has been around for centuries. In the past, most businesses were private, with ownership often passed down through families. However, with the rise of joint-stock companies in the 17th century, public companies became more common. Today however, they still exist and are prevalent in various industries.
Key characteristics of a private company
In order to be considered a private company, a business entity must be:
01. Privately owned, meaning the company is not publicly traded on a stock exchange.
02. Limited liability, the owners' liability is limited to the amount of their investment.
03. Make up of a small number of shareholders, where the shares are held by a small group of individuals, often including the founders.
04. Subject to o public reporting requirements, the company does not have to disclose financial information to the public.
Benefits of starting a private company
If you’re starting a business, establishing a private company could be a potentially good business model to consider for the following reasons:
Flexibility. Private companies have more freedom to make decisions and take risks without worrying about shareholders' opinions or stock prices.
Greater control. The owners of a private company have more control over the company's operations and direction, as they aren't subject to the opinion or votes of shareholders.
Privacy. Private companies do not have to disclose financial information to the public.
Tax advantages. Private companies may have tax advantages over public companies. These may vary from state to state, and country to country.
Examples of private companies
Some examples of private companies include:
You may also be interested in:
Best practices for running a private company
Starting and managing a successful private company is not without its challenges, some of which are a direct consequence of the type of business model and structure. These best practices are a beginners introduction to running a private company well.
01. Have a strong business plan
Since private companies do not have to report to the public, it's essential to have a solid business plan in place to maintain direction and focus.
02. Be financially responsible as a business owner
Private companies need to manage their finances carefully and stay on top of cash flow, especially since they do not have the option of going public for additional funds.
03. Build relationships with investors
Private companies still need funding, so building strong relationships with investors is key to business success and growth.
Challenges of running a private company
One of the main challenges of running a private companies is limited access to capital. Private companies cannot sell shares on the stock market, which can potentially make it more difficult to raise funds. Additionally, private companies may not have access to the same resources as public companies, such as easy access to business banking services.
Private Company FAQ
What's the difference between a private company and a public company?
The main difference is this. A private company is not publicly traded on a stock exchange and has a small group of private shareholders, like family members. A public company is publicly traded and has many shareholders.
Can a private company go public?
Yes, a private company can go public by offering shares on a stock exchange through an initial public offering (IPO). This happens all the time.