What is a Private Sector?
The private sector is a section of the national economy that is not owned by the government. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.
The sector plays a crucial role in economic development. Amazon, YouTube, Apple are all examples of private sector companies.
- The private sector is run by individuals or firms and not the government. Some of its types include sole proprietorship, company, and partnership firms.
- The capital for the private business is arranged by the business owners, shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares., bank loans, or any combinations of the above.
- As opposed to the public sector that the government operates, the primary objectives of the private sector are profit maximization and acting in the best interest of the stakeholders.
- Although focused on profit maximization, private firms help in economic development by enhancing the GDP, employment rate, per capita income, infrastructural facilities, etc.
How Does the Private Sector Work?
We have all grown up hearing about this sector. In fact, national economies are primarily made up of private and public sectors that need to work in harmony for a nation’s welfare. Any discussion on the private sector is incomplete without a private sector vs public sectorPrivate Sector Vs Public SectorPrivate sector banks are banking institutions where the private equity holders hold most of the shares. On the other hand, public sector banks or government banks are banking institutions where the government owns most of the stake. debate. As explained before, the private sector is not owned by the government and is hence privately owned. The business conducted under the sector is also known as a private business.
Since the sector’s primary objective is business generation and profit maximization, customer satisfaction becomes a must for survival. For the consumers, private held companiesPrivate Held CompaniesA privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. offer an enormous variety of goods and services at different rates to satisfy their needs and want effectively. For example, in a mall, consumers can choose from McDonald’s, Taco Bell, Starbucks, and Krispy Kreme.
Due to the high availability of alternatives at the same rate, consumers have the advantage of switching to a competitor if a private business underperforms. The cut-throat competition has created a fast-paced and performance-oriented momentum in the sector over the years.
The public sector focuses majorly on objectives that are for the public interest. The government, especially in developing countries, deliberately keeps certain industries under its control to ensure fair public welfare that could be compromised in a race to maximize profit. Government-owned companies also make a profit, but the underlying tone remains public welfare. For example, a government bond provides a low-risk investment vehicle to the citizens who wish to invest their savings in a safe investment. Having the government’s badge usually gives a sense of trust to the public.
Depending on the requirements of an economy, the spread between the two is decided. There are primarily three kinds of economies – free market, central and mixed. The free market is the capitalist economy where the private sector is in full play, such as the US.
Command or socialist economies hold state control over the business, such as in China, Cuba, and the former Soviet Union. In contrast, a mixed economy has a mixture of the two. India, a developing country, has a mixed economy to balance profit-making and social welfare.
Features of Private Sector
Let’s look at the major features of this sector.
- Individuals and incorporations operate this sector. It functions under various means, such as companies, partnerships, sole proprietorships, NGOs, etc. We will talk about it in detail later in the article.
- A private business is funded by owners, shareholders’ funds (equity), bank loans (debt), or a combination of any.
- Certain main objectives of a private business are profit maximization, business generation, customer and brand expansion. The profit is either distributed amongst the members or reinvestedReinvestedReinvestment is the process of investing the returns received from investment in dividends, interests, or cash rewards to purchase additional shares and reinvesting the gains. Investors do not opt for cash benefits as they are reinvesting their profits in their portfolio. in the business for further growth.
- For companies, the business goals also involve acting in the stakeholders’ best interest. Stakeholders could be customers, shareholders, employees, local laws, etc. Customer satisfaction is a must for survival. Likewise, shareholders need a higher return on their investment. Local laws require a business to be law-abiding and tax-paying.
- Barring some industries, private sector companies and enterprises dominate across most industries in an economy in many nations. As per a 2019 World Economic Forum report, the private sector contributed 60% to China’s GDP.
Example of Private Sector
Some of the leading private firms across the globe are Google, Amazon, Apple, etc. The private sector of any nation forms a crucial working opportunity for its citizens. Some industries that boast of many private firms are –
- Real Estate
Types of Private Sector
They are majorly categorized into three types. Each formation has its benefits and legalities depending upon the number of employees, source of funding, business scale, and government regulations.
- Sole Proprietorship: It is a business owned, incorporated, and sustained by one person. The proprietor can employ others for conducting and managing the business. It bears an unlimited liability towards the business debts.
- Partnerships: In partnerships, two or more people come together to conduct a business. It has lesser legal compliances than a company. The partners are subjected to unlimited personal liability on the business debts.
- Companies: It is created to fulfil organizational goals. A company is often funded by debt-equity. It enjoys a separate legal identity and has certain rights. The owners of a company are called shareholders. These are the people who invest capital and are the prime decision-makers for business-related matters.
Employees usually work under a board of directorsBoard Of DirectorsThe Board of Directors (BOD) refers to a corporate body comprised of a group of elected members who represent the interests of the company and its shareholders. They are at the top of the corporate hierarchy and are responsible for ensuring that the company meets its goals efficiently.. The directors are responsible for carrying the business of a company based on the decisions taken by the shareholders in the Annual General Meeting.
Role of Private Sector
The private sector has many roles concerning the society and national economy.
- Employment: Private firms employ a major portion of the skilled resources and hence act as the backbone of employment services in many nations. As per a 2013 World Bank Report, the private sector provided around 90% of jobs in developing countries. Moreover, these jobs provide innumerable benefits like frequent pay-raise, easy switching, diverse job description, and responsibilities.
- Development: Although government companies focus on national development, this sector’s role in a country’s development often goes understated. When private firms develop industrial areas, plants, and job-hubs, they also develop the areas around them. For example, as per a 2017 study, in India, the private sector’s share in providing jobs had been over 90%, while it also contributed over 75% to domestic capital formation. As such, they enhance the GDP, per capita incomePer Capita IncomeThe per capita income formula depicts the average income of a region computed by dividing the total income of that area by the total population of the region. It is used to figure out the average income of a city, provision, state, country, etc., infrastructure, and quality of life.
- Better Goods and Services: The sector is responsible for providing essential goods and services at a competitively low cost. The lack of monopoly has made these amenities accessible to most citizens of a country.
- Welfare: Private firms have always stepped in the time of need. May it is a disaster or a virus outbreak, they have come up with various solutions to serve the citizens to end their woes. In response to Covid-19, private businesses have been giving monetary support and donating life-saving instruments to the health industry. It has massively helped the citizens and governments around the globe.
- CSR: Although the private sector has often been called out for the way it had achieved profit maximization in the past. Corporate Social Responsibility (CSR) has been a result of this. CSR is a mandatory practice for private firms as it ensures that they give back to society in terms of welfare. CSR programs have uplifted many underprivileged sections of society. It has also ensured sustainable business growth.
- Innovation: The intense competition forces the companies to develop newer technologies and ways to cut down resource wastage. Also, to satisfy the customers better, companies develop innovative products and services that have improved the quality of life.
This has been a guide to the private sector and its definition. Here we discuss how it works along with features, examples, types, roles and key takeaways. You may learn more about financing from the following articles –