What Is a Private Company?

What Is a Private Company?

A private company is a firm held under private ownership. Private companies may issue stock and have shareholders, but their shares are not issued through an initial public offering (IPO) and do not trade on public exchanges. Private firms are not subject to the Securities and Exchange Commission's (SEC) filing requirements. The shares of these businesses are generally less liquid, and their valuations are more difficult to determine.

How Private Companies Work

Private companies are sometimes referred to as privately held companies. They can range in size and scope, encompassing the millions of individually owned businesses in the U.S. and the dozens of unicorn startups worldwide. Private companies have different rules for shareholders, members, and taxation. In 2024, U.S. firms such as Cargill and Koch Industries, with large annual revenues, fall under the private company umbrella.

Remaining a private company can make raising money difficult. This is why many large private firms choose to go public through an IPO. While private companies access bank loans and certain equity funding, public companies can often sell shares or raise money through bond offerings.

Types of Private Companies

• Sole Proprietorship: This is an unincorporated business that puts company ownership in the hands of one person. A sole proprietorship is not a separate legal entity. Its assets, liabilities, and financial obligations fall completely onto the individual owner. While this gives the individual total control over decisions, it also raises risk. The owner of the company files no corporate taxes. Rather, they report business income and expenses on their personal income tax returns.
• Partnerships: These businesses have at least two owners. Partnerships share the unlimited liability aspect of sole proprietorships.
• Limited Liability Company (LLC): This business often has multiple owners who share ownership and liability. A limited liability company (LLC) merges some of the benefits of partnerships and corporations, including pass-through income taxation and limited liability without having to incorporate.LLCs provide owners with protection against personal liability and regulations for LLCs vary by state.
• "S" and "C" Corporations: S corporations and C corporations are similar to public companies with shareholders. However, these companies can remain private and do not submit quarterly or annual financial reports. S corporations can have no more than 100 shareholders and are not taxed on profits. C corporations can have unlimited shareholders but are subject to double taxation.

Advantages and Disadvantages of Private Companies

High costs and strict regulations are two reasons companies often remain private. Doing so allows companies to keep costs down, such as those related to an IPO, avoid burdensome paperwork like financial statements, or annual reports (10-K), and avoid disclosing company progress and spending to regulators and the public.

Private means that company owners can retain more control and is especially effective for family-run companies. Koch Industries has remained in the Koch family since its founding in 1940. Although there are many advantages to remaining private, these companies may find it difficult to raise capital. Unlike public companies, private entities don't trade on public stock exchanges.

Owners may be liable for the financial well-being of their private companies. When a private company faces financial difficulties, the owner may be held responsible for debt and other financial obligations. This can negatively impact the owner owners' credit scores—especially if the company defaults.

Private vs. Public Companies

Unlike private companies, public entities abide by the rules outlined by financial regulators, such as the SEC. This means they must be fully transparent and file paperwork at regular intervals. These documents include quarterly and annual reports, proxy statements, changes in beneficial ownership, and income statements.

The Bottom Line

Many global companies are private, including IKEA, Ernst & Young, and X. The company's owner or owners retain control and aren't subject to scrutiny from regulators. These companies, however, cannot raise money through capital markets to fund their growth or pay their debts. Their shares are not sold to the public.