What Are Private Corporations?
A private corporation is a business entity that is privately owned, either by an individual, a small group of individuals, or another non-governmental entity. Unlike public corporations, the shares of private corporations are not traded on a public stock exchange, and they are generally not available for purchase by the general public. This business structure falls under the broad category of business structures. Private corporations can still issue company stock and raise capital from outside shareholders, but these shares are typically sold through private placements rather than through an initial public offering (IPO). A key characteristic of private corporations is that they do not face the same stringent financial disclosure and reporting standards required of publicly traded companies.
History and Origin
The concept of a corporation, both public and private, has roots stretching back centuries, evolving from early forms of commercial associations and guilds. The modern business corporation originated from a fusion of the joint-stock company, a type of commercial association, and the traditional legal form of corporations developed for medieval entities like guilds and universities. While business corporations appeared in England as early as the 16th century, they were often monopolies chartered by the crown. The incremental development throughout the 19th century in Great Britain, the United States, and other nations, particularly with the passage of general incorporation laws, made the process of forming a corporation more routine for businesses. This legal evolution solidified key corporate features such as limited liability for owners, allowing for the aggregation of resources for larger ventures and the separation of the business entity from its owners.3
Key Takeaways
- Private corporations are privately owned businesses whose shares are not traded on public stock exchanges.
- They typically have fewer shareholders and less stringent regulatory reporting requirements compared to public corporations.
- Private corporations benefit from greater control for their owners and often maintain more privacy regarding their financial operations.
- While they cannot raise capital from public markets directly, they can secure funding through private placements, venture capital, and debt financing.
- Examples range from small family-owned businesses to large multinational enterprises.
Interpreting the Private Corporation
Understanding a private corporation involves recognizing its distinct legal and operational characteristics. Since their shares are not publicly traded, the valuation of private corporations can be more complex and less transparent than that of public companies. Their success is often measured by internal metrics such as profit, revenue growth, and market share rather than fluctuating stock prices. Control generally remains consolidated within the founding family, a small group of investors, or the board of directors, allowing for quick decision-making and strategic flexibility without the constant scrutiny of public markets. This also means that internal corporate governance can be tailored to the owners' preferences.
Hypothetical Example
Consider "GreenLeaf Organics," a company specializing in organic food products. It was founded by three friends who invested their personal savings and secured a loan from a local bank. As GreenLeaf Organics grew, they needed more capital to expand their production facilities. Instead of going public, which would involve selling shares on a stock exchange and adhering to extensive reporting rules, they decided to remain a private corporation. They raised additional funds by selling a stake to a venture capital firm and a few private angel investors. These investors now own shares in GreenLeaf Organics, but these shares are not listed on any exchange, and the company's financial details are not publicly disclosed beyond what is required by law or to its private shareholders. The founders retain majority ownership and control, allowing them to pursue their long-term vision without immediate pressure from public market fluctuations or quarterly earnings targets.
Practical Applications
Private corporations are prevalent across virtually every industry, from small businesses and startups to large, established enterprises. They are a common structure for family-owned businesses, professional practices, and companies that prioritize long-term strategic goals over short-term public market pressures. Many startups, especially those seeking rapid growth, often utilize the private corporation structure to raise equity from private investors like venture capitalists or private equity firms. The U.S. Small Business Administration supports and provides resources to many small businesses structured as private corporations, helping them secure funding and develop entrepreneurial skills. These entities benefit from reduced regulatory compliance burdens compared to their public counterparts, allowing them more operational flexibility.2 Even though private, they are not entirely exempt from oversight; the U.S. Securities and Exchange Commission (SEC) regulates the offer and sale of all securities, including those offered and sold by private companies, and they must comply with anti-fraud provisions.
Limitations and Criticisms
Despite their advantages, private corporations face certain limitations. One significant challenge is their restricted access to large pools of capital that public markets offer. While they can raise funds through private placements, the scope of potential investors is much smaller, and shares are generally less liquid, making it harder for existing shareholders to exit their investments. They also often face higher administrative burdens and accounting costs compared to simpler structures like a sole proprietorship or partnership, due to the need for formal record-keeping, annual filings, and adherence to specific corporate laws. Furthermore, because their financial information is not publicly disclosed, private corporations may experience a lack of external scrutiny, which can sometimes lead to less transparency in their operations.1 Directors and owners of private corporations also have specific legal obligations, and failure to meet these, such as filing annual returns or paying taxes, can sometimes lead to personal liability.
Private Corporations vs. Public Corporations
The primary distinction between private corporations and public corporations lies in their ownership structure and access to capital markets.
| Feature | Private Corporations | Public Corporations |
|---|---|---|
| Ownership | Held by a small group of individuals or entities. | Shares traded openly on stock exchanges by the public. |
| Share Trading | Shares are not publicly traded; limited liquidity. | Shares are publicly traded; high liquidity. |
| Capital Raising | Through private placements, venture capital, debt. | Through IPOs, follow-on public offerings, bonds. |
| Regulatory Scrutiny | Less stringent SEC reporting requirements. | Highly regulated by SEC, extensive disclosures. |
| Financial Disclosure | Generally private, disclosed only to shareholders. | Publicly available financial reports (e.g., 10-K, 10-Q). |
| Control | Owners/founders retain significant control. | Dispersed ownership, control can be diluted. |
Confusion often arises because both types are "corporations" and provide limited liability to their shareholders. However, their operational frameworks, funding mechanisms, and the level of public accountability are fundamentally different. Public corporations exist to serve public shareholders, while private corporations prioritize the interests of their specific private owners.
FAQs
What is the main difference between a private and a public corporation?
The main difference is that a private corporation's shares are not traded on a stock exchange, whereas a public corporation's shares are. This affects their fundraising methods, regulatory compliance burden, and transparency.
Can a private corporation have shareholders?
Yes, a private corporation can have shareholders. These shareholders typically acquire shares through private agreements rather than purchasing them on a public market. The number of shareholders might be limited by law, depending on the jurisdiction and type of private corporation.
Are all small businesses private corporations?
No. While many small businesses are structured as private corporations (such as S-corporations or C-corporations in the U.S.), they can also be formed as sole proprietorships, partnerships, or limited liability companies (LLCs). The choice of business structure depends on factors like liability protection, tax implications, and ownership goals.
Do private corporations have to follow any regulations?
Yes, private corporations must comply with various regulations, including state incorporation laws, tax laws, labor laws, and anti-fraud provisions related to securities offerings. While they generally have fewer reporting obligations to the SEC than public companies, the SEC does regulate the sale of securities by private companies, particularly for fundraising activities.
Why would a company choose to remain private?
Companies may choose to remain private to maintain greater control over their operations, avoid the costs and scrutiny associated with public reporting, and focus on long-term growth without pressure from quarterly earnings expectations. It also allows for more privacy regarding financial and strategic information.