Private corporations are also referred to as closely held corporations. In general, private corporations are smaller corporations owned by a few shareholders. Stock issued by a private corporation is unavailable to the public, and isn't traded on any stock exchange.
One of the major advantages of being a private corporation is the ability to make fast decisions. Large corporations may have a large board of directors, with a number of officers and shareholders. Therefore, large corporations have to undergo votes by all shareholders to decide on corporate initiatives. It may take much longer to assemble shareholders of a large public corporation, as opposed to a privately held corporation with a small number of shareholders. In fact, privately held corporations may have one owner who acts as the director, shareholder and officer of the corporation. In this instance, all corporate responsibilities rest with one owner or shareholder.
One of the primary reasons small businesses form a private corporation is to protect their personal assets. Private corporations are just like any other corporation in terms of asset protection. Any debts or obligations of a private corporation are separate from the personal assets of its shareholders.
Pass Through Tax
Privately held corporations may elect to be recognized as an S corporation. This will allow shareholders of the private corporation to pass through their share of profits and losses to their individual, or joint tax returns. The alternative, being recognized as a C corporation, leads to double taxation.
There is a significant amount of paperwork involved when operating a privately held corporation. Closely held corporations must keep detailed records of corporate meetings and minutes. Corporate tax returns and annual reports must be filed in a timely fashion. Private corporations must keep finances of the corporation separate from personal assets, even if the corporation has a single owner.
Ability to Raise Capital
Privately held corporations aren't able to raise capital as easy as larger, publicly traded companies. Public corporations are able to raise money by issuing new stock, which may be traded on Nasdaq or the New York Stock Exchange.
- Jacob Wackerhausen/iStock/Getty Images