Updated July 10, 2023
What is a Privately Held Company?
A privately held company is a company that a relatively small number of shareholders own or a non-governmental organization that does not offer its shares or stocks for sale or trading to the general public on stock exchanges. Instead, these companies privately trade or exchange their shares.
In several instances, once publicly traded companies have also converted themselves into privately held companies through a leveraged buyout. Privately held companies, also known as private companies, private corporations, limited liability companies, or limited companies, are popularly referred to based on the country of incorporation and their structure.
How Does a Privately Held Company Work?
A privately held company may issue stocks and bring in more shareholders, but they don’t trade on public stock exchanges. Private companies do not need to fulfill the stringent filing requirements of the Securities and Exchange Commission (SEC) that are necessary for public companies. Consequently, the shares of these companies are less liquid, and it is very difficult to determine their valuations.
All the US companies start their businesses as privately held companies. However, private companies vary in size and scope, covering millions of individually owned businesses and dozens of startups. Privately held companies include family-owned businesses, partnerships, sole proprietorships, and small to medium-sized enterprises (SMEs). Given the lack of access to public funding through stock exchanges, these companies can only raise money through private investments, loans from lenders, or company profits.
Who Owns a Privately Held Company?
A few shareholders, investors, non-government organizations, or even individuals typically own a privately held company. Shareholding seldom changes as it doesn’t sell its stocks to the public on stock exchanges. In the case of a share transfer, it takes place privately among a small number of existing shareholders or a few new investors.
Example of a Privately Held Company
Globally, many privately held companies comfortably outnumber the number of public companies. Many large businesses eventually go public to access the capital markets and enhance their liquidity. However, a substantial number of well-known companies remain privately held. These well-known privately held companies include Koch Industries, Deloitte, PricewaterhouseCoopers (PWC), Ernst & Young (EY), KPMG, C. Johnson, IKEA, Rolex, and LEGO.
Types of Privately Held Company
Three major types of privately held companies exist sole proprietorship, partnership, and limited liability company.
1. Sole Proprietorship
This type of privately held company has only one owner. There is no separation between the entity and the person owning it. The company owner exercises unlimited freedom and the right to make company decisions. However, it results in huge risk as the owner is personally responsible for all its liabilities. It is way more difficult to raise funds for a sole proprietorship.
2. Partnership
It is just an extension of the sole proprietorship with the only difference in the number of owners, which is more than one. Like sole proprietorship firms, the owners enjoy unlimited decision-making autonomy, which comes in exchange for unlimited liability.
3. Limited Liability Company (LLC)
In this type of privately held company, multiple owners share the responsibilities. An LLC enjoys the benefits of both a partnership firm and a corporation. Two major advantages of LLCs are that the owners can have a pass-through income tax, and they only bear limited liability to the extent of their own in the business.
Why do Private held Companies Stay Private?
Although there are many reasons why companies choose to remain private, some of the most important ones are as follows:
- Being a public company puts the entity under an additional layer of scrutiny. According to the SEC, public companies must issue shareholder reports compliant with the Generally Accepted Accounting Principles (GAAP). Although private companies must keep their books in shape and present shareholder reports, there are seldom any immediate legal implications due to late reporting or lack of reporting.
- The privately held companies have the flexibility to employ different types of corporate structures that are not possible in the case of public companies. Moreover, even private companies can use terms and conditions that the investors won’t allow in public companies.
- Staying private also helps promoters maintain family business ownership without answering many shareholders or investors. Many of the largest privately held companies today have their legacy, owned by the same families for multiple generations.
Key Takeaways
Some of the key takeaways of the article are:
- A privately held company is owned by a relatively small number of investors or a non-governmental organization.
- Its shares are not traded publicly on the stock exchanges. Instead, whenever there is a need to raise capital or ownership, the shares are issued or exchanged among a small group of people.
- Many public companies become privately held companies through leveraged buyouts.
- The privately held companies can be divided into – sole proprietorship, partnership, and limited liability companies.
- Unlike a public company, a privately held company doesn’t need to answer many public investors while making important decisions.
Conclusion
So, it can be seen that there are benefits to staying private, and so many large companies continue to remain privately held companies. However, liquidity and funding may become difficult for these companies, so many large privately held firms eventually choose to become public through an IPO. Whether remaining private or going public depends on business needs and objectives.
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