The Advantages of Being a Privately Owned Company
Businesses, regardless of the products or services they offer, have the option of operating as either a privately- or publicly-owned company. Although neither option is better than the other, there are specific advantages and disadvantages of being in the public or private sector that founders and company leaders take into consideration before deciding which path makes sense for their respective companies. Here are a few benefits of being a private company.
One of the advantages of private ownership is that founders and owners remain in sole control of their business and its operations. With a public company, founders and management must answer to the company's shareholders and board of directors.
Certain business decisions, such as stockholder distributions, borrowing or lending money, employee benefit plans and annual budgets, must be approved by the board of directors before they can be put into place.
With a private company, owners make the decisions without outside permission, as long as they have majority control of the company.
Any person or entity that owns just over half of a company has majority ownership and can make business decisions by themself.
Public companies must report their financial results and standing every quarter. These quarterly reports include information such as a company's gross revenue, net profit, cash flow and operational expenses.
One of the advantages of private ownership is that companies don't have to provide any information regarding their finances. This eliminates external pressures to meet particular financial goals and results and keeps information that may give their competitors an insight into their operations in-house.
S corporations, for example, only have to file annual reports with their state's Secretary of State. These reports list the company name, address, registered agent and active officers. No financial information is required.
Regardless of the consumers they serve, the truth is that public companies are in business to make their shareholders money, which usually means keeping the stock price up. Because public companies must give quarterly business updates, they may be more inclined to focus on providing short-term results.
Not having to answer to shareholders every quarter allows businesses to focus on long-term growth and business objectives. Of course, short-term goals must be met to fulfill long-term objectives, but not feeling pressured to produce short-term results lets companies make business decisions that may not benefit them in the short term but will move them closer to their long-term goals.
The Securities and Exchange Commission (SEC) has rules – referred to as principles – that designate how a public company is governed. Being a private company means that the business does not have to abide by these rules.
Having the autonomy and flexibility to govern a company as leadership sees fit, withing the framework of the law, is one of the benefits of being a private company.
It also does not help that complying with some of the SEC's rules can be very costly for smaller companies. These additional expenses can include the cost for audit fees, the cost of maintaining investor relations, the cost to maintain an accounting oversight committee and even the cost of the generation of financial reporting documents.
Taking a company from private to public is not just a matter of submitting a form and being approved. There are lots of costs associated with the process.
From direct costs and indirect costs to one-time costs and recurring costs, the expense of going public can reach into the millions.
Choosing to stay private allows companies to avoid these costs and gives them a chance to use the money for other matters that benefit the business.