What is a Company?
Companies are primarily established to generate profit through business activities; however, some may be structured as nonprofit entities, such as charitable organizations. They may be owned by a single individual or by multiple shareholders.
A company possesses legal rights and obligations akin to those of a natural person, including the capacity to enter into contracts, secure financing, satisfying tax liabilities, acquiring assets, engage in legal proceedings, and employ individuals.
Distinction between a Company and a Corporation
While all corporations fall within the broader category of companies, not all companies are structured as corporations. Common classifications of corporations include S corporations and C corporations.
A corporation is a distinct legal entity, separate from its owner or owners. In the case of large, publicly traded corporations, ownership may be distributed among thousands or even millions of shareholders.
Distinction between Private and Public Companies
A private company is a business entity owned by private individuals, including its founders, management, or a select group of private investors. Unlike public companies, private companies are not required to disclose their business operations or financial performance to the general public.
A public company, on the other hand, has offered a portion of its ownership to the public through an Initial Public Offering (IPO), thereby granting shareholders a financial interest in the company’s assets and profits. Public companies are subject to regulatory requirements mandating the disclosure of their financial and business activities.
Major Differences Between Private and Public Companies
- Ownership
Private companies are owned by founders, executive management, and private investors.
Public companies are owned by shareholders who acquire stock through an Initial Public Offering (IPO) or public trading. Shareholders, despite not being involved in daily operations, can influence management decisions.
- Source of Capital
Private companies raise capital through private investors, such as their shareholding owners or private investors, or by securing loans from financial institutions.
Public companies generate capital by selling shares to the public or issuing debt, providing them with broader access to funding in comparison to the private companies.
- Public Disclosure Requirements
Public companies are legally obligated by the Securities and Exchange Commission (SEC) to disclose financial, business activities, business results and other materials through periodic filings. They are also subject to media scrutiny.
Private companies are not required to publicly disclose financial information or register with the SEC, although proposed legislation, as introduced in the U.S. Senate may impose such obligations. They are not subject to media scrutiny.
Can a Public Company Transition to Private?
Yes, a public company can become private if the decision is approved through a shareholder vote. Typically, this requires the company to repurchase a sufficient number of its shares or already hold a controlling interest, enabling it to secure the necessary votes for privatization.