Francis Bacon once wrote that “a prudent question is one-half of wisdom.” Understanding the corporate structure, benefits and drawbacks of potential investment types is necessary to anticipate potential returns and build a financially sound future. There are varying differences between the two basic investing types, private investing and public investing; some differences are more commonly understood than others.
Who Owns It?
At their core, private companies are privately owned. The definition of “privately owned” is a term that encompasses several meanings. A privately owned company may be owned by a single individual or it may be owned by a group of private investors. Most often, the majority of a privately held company is owned by the founder with the founder’s family, friends and business associates owning a smaller portion. The ownership percentages and number of shareholders vary from company to company, but more often than not, the larger the total capital of a company, the greater the quantity of its investors. A private company will tend to have fewer investors, as its scope of offering is significantly smaller, commonly limited to the family, friends and business associates of the owner. Shareholders of a private company, however, can often control whether their ownership is publicly announced or not.
Unlike private companies, public companies are, by definition, offered to a larger group of potential investors. Sure, a public company can be held by a few massive investors. A public company must be partly owned by the public. These shareholders have access to the company’s stock (a share of the business itself). They can usually buy and sell at will, and they become partial owners of the company’s assets and profits. A public company is a member of the public offering pool, partially owned by shareholders, each with varying degrees of ownership and investment amounts.
What Is Secret and What Isn’t?
With few exceptions, a private company has no obligations to disclose to the public much of anything. That includes its business structure, investors and profits. Of course, transparency can be healthy for any company. This offers an important insight into the development of the company and its level of organization and procedure, which builds and sustains trust. Having this information public could be greatly beneficial to some company’s long-term internal success; however, there is no legal obligation to do so.
Public companies, on the other hand, are legally bound under specific laws and regulations to disclose and be open with certain information. The nature of public companies necessitates full disclosure of specific occurrences within a company to investors and shareholders, because they may own, buy or sell the company. This type of disclosure often includes who else owns it (or at least who else owns a good amount of it), as well as quarterly earnings and some internal information.
Nintendo Co, the popular video game company, announced huge losses (just under $500 Million USD) for its quarterly session in April of 2012. This necessary public disclosure held a significant role in the decisions of its current investors, and led many shareholders to sell their stock. Fortunately or unfortunately for Nintendo, as a publicly traded company it was obligated to notify investors of their losses.
This is part of the corporate public structure. This information is freely and readily available to the public upon request through the Securities and Exchange Commission, and often on the websites of the companies or through financial news sites such as Yahoo Finance or Google Finance.
Which Type is Better for Me?
There are infinite variables that go into business expansion and growth, and innumerable attributes that must be accounted for in business. The question of whether a public or private investment is better for a particular investor is one that will require careful consideration.
In most cases, the greatest difference between private and public companies lies in their varying abilities to tap finances and access capital for growth. In other words, public companies are able to access funds almost immediately through the offering of their stock or bonds, while private companies may still sell stocks or private bonds, but finding qualified investors is often more difficult and time consuming, which often leads these companies to rely on savings instead of stock or bond offerings. The ability to raise capital allows the company to fund new projects and grow and is the greatest variation between the two types of companies.
Private companies often seek private offerings to expand. This allows them to build a relationship and strength with loyal investors who may be excited about getting involved, as opposed to public capital which is often impressionable and unreliable as a result. Management and shareholders of private companies have no public shareholders to speak for, so their freedom is often much greater.
There are smaller differences between private and public companies which go slightly beyond the scope of this book. For example, in several Canadian jurisdictions, a private company is only allowed a maximum of 50 members, as opposed to a public company which may have an unlimited number of shareholders and often holds thousands of investors. This, in and of itself, has benefits and drawbacks, including budgets for investor relations and shareholder communications.
Without going into great detail, public companies have restrictions that are largely unknown to privately held firms. Some restrictions affect management salaries, which cannot exceed 11% of profits, and statutory meetings which are required on a consistent basis in many cases.
These are the broad stroke differences between the two structures, as well as some slightly more obscure, yet relevant information. Ultimately, a private company is often more agile because of a lack of restrictions, and can move swiftly without a necessity to speak for shareholders in the public market. Public companies are frequently tied down through oversight and regulations. They are obligated to offer greater transparency and are bound by SEC regulations, yet have access to much greater capital and hold the potential for massive growth given the appropriate conditions.
Many private companies may reach a financial plateau, unable to access the capital or investors for growth, and without the appropriate knowledge, management and private investors they may never overcome this plateau unless they go public.