Advantages & Disadvantages of a Closely Held Corporation

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The main difference between a publicly traded and a closely held corporation is capital. Public offerings of stock allow corporations to attract sometimes large amounts of equity capital that in turn allows them to grow and achieve new goals. However, that's only a benefit in the right circumstances. Closely held corporations allow owners and founders greater control over their their companies and fewer regulations governing their operations. Depending on a company's size, potential and shareholder goals, a closely held corporation can have distinct advantages.

Control

Owners of closely held corporations have tremendous say over the fate of their companies. While publicly traded companies have to comply with Securities and Exchange Commission rules on the free trade of issued shares -- which can invite issues such as hostile takeovers -- closely held companies stay within the hands of a few, or even just one owner. Additionally, while directors of publicly traded companies have a legal and ethical obligation to put shareholder interests first by maximizing profits, closely held corporation shareholders can elect to forgo profits, give to charity and reinvest in their company in any way they see fit.

Freedom

Because owners of closely held corporations have more control, they also have more freedom to try new ideas and take risks. Without public shareholders worrying about stock prices and dividends, privately held companies can take on high-risk, high-yield projects and ventures. Additionally, depending on how corporations are structured, executives may not need to account for how they spend every dollar of a company's money or why they tried an idea that failed.

Capital

Closely held companies sometimes face challenges getting the funds they need for expansion and growth. If they have good revenues, long histories and good reputations, loans are possible. Equity capital can be harder to come by because investors must rely solely on the company returning profit, or dividends to them. However, a publicly traded company or one planning to issue public shares can attract a broader array of willing investors who stand to profit both from increased share prices as well as dividends. Stock markets offer corporations a quick and ready supply of equity capital.

Sale

Selling a privately held company can be difficult. Sellers and buyers frequently disagree on the company's worth, which leads to protracted negotiations and failed deals. Furthermore, finding a buyer capable and interested in purchasing an entire company is often challenging. However, on a public stock exchange, buyers are available around the clock. Founders and early investors have a much easier time selling their interest in a company at a substantial profit after their company has successfully gone public.

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About the Author

Eric Feigenbaum started his career in print journalism, becoming editor-in-chief of "The Daily" of the University of Washington during college and afterward working at two major newspapers. He later did many print and Web projects including re-brandings for major companies and catalog production.

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