Public Company vs Private Company-Advantages and Disadvantages
Those who are planning to invest in a particular business must be aware of the choices they have. If you plan to invest in stocks, you might be in the middle of private or public companies. Both are excellent choices, although they each have their drawbacks and key takeaways to consider.
In a nutshell, it is much easier to participate in public companies’ investments than private ones. The stocks of public companies are available on exchanges. Therefore, all you need to do is find a trustworthy brokerage that can make the transactions on your behalf. You can purchase a share from a particular brokerage and be a shareholder in the company’s ownership.
Meanwhile, the procedure could be more complicated when it comes to private companies’ investments. The investment is usually made through crowdsourcing, internal offices, or partner firms. Investing in private companies also requires a high capital amount as the minimum investment.
The comparison above is only the tip of the iceberg. Here are the exact differences between a private company and a public company. The more you understand the vast differences between them, the more you know what kind of investment you are interested in the most.
Learn all the options before proceeding with your decision to invest in a private company and a public company.
Public Company definition
Public companies are businesses that have achieved the IPO-Initial Public Offering. Therefore, you can purchase their shares through official brokerages at more affordable prices. A lot of IPO shares are attainable without the huge capital to start with. You can buy the company’s claims and sell them, as well as repurchase them in the future.
Private Company Definition
A private company is an entity owned by exclusive individuals with a set number of shareholders. Since it is personal, the shares of the company are not available to the public. Therefore, you won’t be able to get the shares through the brokerages. It is necessary to make contact with the founders directly to purchase the shares. These companies are funded privately by the founders, friends, family members, or the concerned partners of the founders.
Key differences
There are some key differences that you need to know between private and public companies.
Raising capital
Public companies have much more significant capital raising channels because their shares are available to the public. It is so easy to purchase their shares through brokerages.
Meanwhile, private companies have fewer options to raise their capital.
The availability
As mentioned, the shares of public companies are already available in brokerages. All you need to do is to choose a trustworthy brokerage and purchase their shares. These shares are even available in retirement investment plans. Selling and buying will not be an issue. It is also easy for investors to diversify their investment portfolio by purchasing a tiny number of shares.
Meanwhile, the shares of private companies are a lot harder to sell. You will need to find desirable buyers to get the shares. It can also be complicated to sell the shares.
PROS AND CONS
You will need to weigh between the two options. Therefore, here are the pros and cons of public companies and private companies.
Public Companies Advantages
1. We are selling stocks to raise funds
One of the perks for public companies is to have access to raise funds through selling the company’s stock. Before becoming an IPO, it would be more challenging to attain the large amounts of capital they need to finance their overall business and operations. They can quickly raise funds in the primary and secondary markets by offering the company’s shares to the public.
2. Transparency of financial information
Before investing in a particular company, you will want to know about the financial situation of the respective company. The public companies will submit the quarterly and annual financial statements as required by the SEC. The shareholders, public media, and prospective investors will be able to attain this kind of information. You can get the data from the financial analyst even though you haven’t purchased their share.
Public Companies Disadvantages
Here are some cons of investing in public companies.
1. Government regulations
The particular company must meet the requirements set by government entities such as the IRS and SEC. The regulations can change from time to time, affecting the price of the shares and the administrations.
2. Global accounting standards
IFRS and GAAP must prepare the financial reports.
Private Companies Advantages
Here are some pros to investing in private companies:
1. Low authorized share capital
Depending on the scale of the company, the share price could be affordable.
2. Limited Liability
The members’ assets will still be safe and sound when there is a bad financial condition in the company. The liability of each member is limited. So, every individual who contributes to the company can have peace of mind.
3. Transfer of the shares in the circle
Once the investors join the circle of private investors, it can be easy to transfer between the shareholders.
4. Perpetual succession
The existence of the company is safe and sound. A company is separated from a legal person. Therefore, any departure of the members won’t affect the presence of the company.
5. More independent
A private company is not affected by public dogma and pressure. It is also rare that politics, religion, and other sensitive issues jeopardize the existence of a company.
Private companies disadvantages
Here are the most common disadvantages of private companies:
1. Shares transfer restrictions
The shares can be easily transferred between the shareholders in the circle. However, the claims of its articles will be more challenging since they are not available to the public.
2. The limited number of shareholders
The number of shareholders can not exceed 50 unless they are going public.
3. Shares are not available to the public.
Since these are not available to the public, the sales must be direct, without brokerage. It will be challenging to find exciting investors who can trust private companies with their investment.
