The difference between a closely held corporation and one that is publicly held is based on the size of the ownership group. All corporations are owned by groups of investors. A closely held business has only a few shareholders. By contrast, any investor with the necessary funds can buy stock in a publicly held firm and become an owner. A company's status as closely held or public impacts multiple issues, including regulatory oversight, the price of shares and even how the firm is managed.
The Closely Held Corporation
A closely held corporation is one with a limited number of shareholders. Investors in a closely held company make few stock trades and often hold shares for decades. Also referred to as closed corporations, closely held firms are sometimes listed on stock exchanges or over-the-counter markets. When a closely held company is not listed on these markets, it is considered a privately held company.
One characteristic of closely held corporations is that the majority shareholders exercise greater control than you typically see in publicly owned firms. This may produce a degree of stability because policy is determined based on its impact on the business and not on the impact on stock prices.
Publicly Traded Entity Definition
A publicly traded entity starts as a private corporation. If the owners decide to take the firm public, they do so using an initial public offering. The company must meet regulatory requirements and arrange for the stock to be listed and traded on an exchange or over-the-counter markets. Once a company has gone public, the number of shareholders is no longer limited. The investors in a publicly traded firm can number in the tens of thousands or more. Public companies often continue to raise capital after an IPO by issuing more shares that members of the public can buy. The original ownership has less control over the company
The Securities and Exchange Commission tightly regulates publicly traded companies. They must disclose financial statements and publish an annual report for investors, as well as filing periodic reports with the SEC. Also, a public company must adhere to the standards and rules of the stock exchanges on which it is listed.
Private vs. Public Company
When owners are building a company, they face the choice of staying a closely held corporation or of going public. There are advantages either way. With a private or closed company, there are only a few investors who own a majority of the stock and thus control the firm. Since the shares are not traded on the open market, share prices may be more stable.
Consequently, decisions are made for business reasons. And regulatory oversight is not as extensive, which gives managers more time to concentrate on running the firm. It also makes it easier to keep company information confidential.
The most obvious incentive for taking a company public is access to capital markets. Once the stock is trading on open markets, the firm can raise new capital by issuing more shares. The greater volume of trading can also make the stock more attractive to investors because it increases liquidity and makes it easier to know what the market value of the shares is. However, a public company must deal with outsiders who can vote in stockholders' meetings and are entitled to documents and notifications regarding the activities of the business.
Sometimes the owners and management of a publicly traded corporation choose to return to a closed or private ownership model. This is done by purchasing the outstanding shares of the company and delisting it on exchanges. This course can free up managers because they no longer have to keep one eye on the daily stock quotes. It is easier to avoid forced takeovers by outsiders. Perhaps the biggest potential advantage is that management has more freedom to take risks and engage in long-term projects that have high growth potential.