Privately Owned

What Is Privately Owned?

A privately owned company is a company that is not publicly traded. This means that the company either does not have a share structure through which it raises capital or that shares of the company are being held and traded without using a exchange. Privately owned companies incorporate family-owned businesses, sole proprietorships, and the vast majority of small and medium-sized companies.

These companies are many times too small to conduct a initial public offering (IPO) and will more often than not satisfy their funding needs using personal savings, inherited money, and additionally loans from banks. Albeit numerous small businesses fit the definition of a privately owned company, the term privately owned is most frequently used to allude to companies that are sufficiently large to be publicly traded yet are still being held in private hands.

The shares of privately owned companies are more difficult to sell due to the questionable idea of their real value and the lack of an exchange that supports transparency and liquidity.

How a Privately Owned Company Works

Privately owned companies are definitely more normal than publicly traded companies. Privately owned companies might be owned by an individual, a family, a small group, or even hundreds of private investors or venture capitalists.

Companies that were once publicly traded can also be made private again through a leveraged buyout (LBO). In 2016, for instance, the ride-sharing company Uber had north of 7 million common shares outstanding and 11 million preferred shares held by a large number of venture capitalists. The Securities and Exchange Act of 1934 states that the total number of shareholders generally should not surpass 500. Crowdfunding and the trend of technology companies staying for longer in the venture capital phase have raised questions about whether this shareholder limit should be increased.

Privately owned companies are also alluded to as being privately held.

Privately Owned vs. Publicly Traded

A privately owned business might be contrasted with a publicly traded company. A publicly traded company is a corporation owned by various public shareholders. The shares of public company stock are traded on an exchange. These companies are considered "public" since shareholders, who become equity owners of the company, can be composed of anyone who purchases stock in the company. Albeit a small percentage of shares are initially drifted to the public, daily trading in the market determines the value of the whole company.

A privately owned business may "open up to the world" through an initial public offering (IPO). This process means that shares of the company's stock are issued to the public in a brand new stock issuance. An IPO can be a useful tool to raise capital from public investors. Some companies might have private shareholders prior to opening up to the world, in which case the private-share ownership might be changed over completely to public ownership.

Prior to its IPO, the company will select a underwriter and choose an exchange where the shares will be issued and afterward traded publicly. The underwriters market the proposed share issuance to estimate market demand and establish a last offering price. A board of directors that consists of members both internal and outside to the organization must be formed prior to the IPO date. The board is an overseeing body that meets at standard intervals to set policies for corporate management and oversight.

Moreover, the company must meet requirements set forward by the exchange listing and the Securities and Exchange Commission (SEC). This includes filing a Form S-1 registration statement with the SEC. The registration statement includes information on the arranged use of capital proceeds, details of the business model and competition, a concise prospectus of the arranged security, and the methodology used to calculate the offering price.

Advantages and Disadvantages of Being Privately Owned

IPOs are a mind blowing tool for raising a large amount of capital to fund the growth of a business and cash out early investors. All things considered, there are many reasons why a company might choose to remain privately owned. First, being a public company comes with an additional layer of scrutiny. Public companies are required by the Securities and Exchange Commission (SEC) to issue shareholder reports that consent to Generally Accepted Accounting Principles (GAAP).

Privately owned companies should still keep their books in shape and consistently report to their shareholders, however there are usually no immediate legal implications of late reporting or not reporting by any stretch of the imagination. Most privately owned companies still use GAAP because it is considered the gold standard in accounting practice. Furthermore, most financial institutions will require annual GAAP consistent financial statements as a part of their debt covenants while issuing business loans. Consequently, in spite of the fact that it's not required, privately held companies will generally use GAAP.

Privately owned companies can use corporate structures that public companies can't, setting terms for investors that wouldn't be permitted in the public market. In some ways, privately owned companies have more freedom than public companies that must answer to a larger crowd.

Highlights

• Not at all like a public company, a privately owned company does not need to answer to public investors.
• Privately owned companies incorporate family-owned businesses, sole proprietorships, and the vast majority of small and medium-sized companies.
• A privately owned company does not have a share structure through which it raises capital, or its shares are being held and traded without using an exchange.