Public vs Private Companies: Key Differences You Need to Know

Imagine businesses as different types of clubs. Some clubs are very exclusive, perhaps just for a small group of friends or family. Others are open to anyone who wants to join. This club analogy helps illustrate the fundamental difference between a closely held company and a public company.

A closely held company, sometimes also called a private company, is like that exclusive club. Ownership is concentrated within a small, select group of people. Think of a local bakery that’s been in your town for generations, owned and run by the same family. Or picture a tech startup founded by a few college friends with a brilliant idea. These are often closely held. The shares of ownership in these companies, which represent a piece of the business, are not available to the general public. You can’t just go to a stock market and buy a slice of ownership in that family bakery. The owners are very specific about who gets to be part of their club, and transferring ownership often requires the agreement of the existing owners. Decisions are typically made quickly and internally by this core group, and they have a great deal of control over the direction of the business. Closely held companies often prioritize long-term goals and personal relationships with employees and customers, sometimes over immediate profits for external shareholders since there are no external shareholders to worry about. They also enjoy a greater degree of privacy, as they aren’t obligated to publicly disclose detailed financial information.

On the other hand, a public company is like a club where membership is open to anyone. These are often much larger, more established businesses. Think of well-known brands you see advertised on television or the companies whose logos you see on the sides of buildings in big cities. Public companies have offered their shares of ownership to the general public through something called an Initial Public Offering, or IPO. This means anyone can buy shares in the company, typically through a stock exchange. Because ownership is spread across potentially thousands or even millions of people, no single person or small group usually has controlling power. Instead, decisions are often made by a board of directors who are elected by the shareholders. Public companies are subject to much stricter regulations and reporting requirements. They must regularly disclose detailed financial information to the public, ensuring transparency and accountability to their shareholders. This transparency is like having the club’s financial books open for anyone to see. Public companies are often focused on maximizing shareholder value, which can sometimes mean prioritizing short-term profits to keep investors happy. Raising capital for growth is also different for public companies. They can issue more shares to the public to raise large sums of money relatively easily, a process that would be much more complex for a closely held company which would likely rely on loans or private investment.

In essence, the key difference boils down to accessibility of ownership and the scope of public scrutiny. A closely held company is like a private, intimate gathering, while a public company is a large, open festival. One values privacy and control among a select few, the other embraces widespread ownership and public accountability. Both types of companies play vital roles in the economy, each with its own advantages and disadvantages depending on its goals and stage of development.