Corporate Finance Tutorials
- Business Ownership
- Holding Company (Parent Company)
- Subsidiary Company
- Privately Held Company
- For Profit vs Nonprofit Organizations
- Public Company vs Private Company
- S Corporation (S Corp)
- C Corp vs S Corp
- C Corporation
- LLC vs Partnership
- LLC vs Sole Proprietorship
- LLC vs Inc (Corporation)
- Joint Venture vs Partnership
- Sole Proprietorship vs Partnership
- Types of Bankruptcies
- Chapter 7 vs Chapter 13 Bankruptcy
- Chapter 11 vs Chapter 13
- Key Man Clause
- Proxy Vote
- Licensing Vs Franchising
- Private Sector vs Public Sector Banks
- Equity Capital
- Debt Capital
- Debt vs Equity
- Types of Credit Facilities
- External Sources of Finance
- Letter of Credit (LC)
- Line of Credit
- What is Money Market?
- Callable Bonds
- Mezzanine Financing
- Subprime Loans
- Leveraged Finance
- Microfinance Loan
- Stocks vs Bonds
- Loan to Value Ratio – LTV
- Loans vs Advances
- Imputed Interest
- Mortgage Banker vs Broker
- Mortgagee vs Mortgagor
- Best Money Market Books
- Cost Center Vs Profit Center
- Economic Order Quantity Eoq
- Buying Vs Leasing
- Mortgage Vs Hypothecation
- Lease Vs Rent
- Deficit vs Debt
- Internal Reconstruction Vs External Reconstruction
- Corporate Finance Careers
- Corporate Finance Interview Questions
- Corporate Finance Career Path
- Best Corporate Finance Books
- CFO Job Description
- Project Finance Jobs
- How To Get Into Project Finance
- Careers After Bfm Baf
- Jobs For B Com Graduates
- Finance vs Marketing
- Finance vs Consulting
- Career in Banking Sector
- Careers in Finance
- Careers in Commerce
- Career and Scope After B.Com
- Corporate Finance vs Investment Banking
- Corporate Finance vs Project Finance
- CEO vs President
- Twitter Profiles To Follow In Finance
- Wall Street Movies
What is a Privately held Company?
A privately held company is a company that is not listed on any stock exchange. Rather, it’s owned by few high net-worth individuals who have bought the shares of the company.
Being a private company has its benefits as well as disadvantages.
- One of the most important benefits of being a privately held company is that it doesn’t need to adhere to any SOX or SEC regulation. Since preparing documents for SOX and SEC Regulation is pretty expensive, being a privately held company helps the owners save a lot of money.
- One of the disadvantages of being a privately held company is that selling shares in the private market is pretty difficult. If you’re one of the owners of a privately held company and you want to sell off your shares in the private market; you need to wait months to sell off. As the private shares are highly illiquid, it’s tougher to sell these shares.
However, being a private company does give its owners a lot of autonomy and freedom. Since adhering to regulations is an afterthought, they can always think about the long-term future of the company rather than worrying about the next quarter’s profit figure.
Types of Privately Held Companies
There are few types of private companies. Let’s have a look at them below –
- Sole Proprietorship: The first type of private company is the sole propreitorship. A sole proprietorship company doesn’t have a separate entity. It’s same as the entity of the person. As a result, the owner of the company gets the unlimited freedom to make her own decisions. But at the same time, the risk is huge and raising money becomes way too difficult.
- Partnership: Partnership is an extension of a sole In partnership companies, the only difference is the number of owners is more than one (or at least two). The owners have the same unlimited liability and at the same unlimited autonomy to make decisions.
- Limited Liabilities Companies (LLC): This is another type of privately held companies. LLCs have more than multiple owners and share the responsibilities. LLCs provide the benefits of both partnerships and corporations. Two of the most important advantages of LLC are first, it can have pass-through income taxation and second, it has limited liability without having to incorporate.
Advantages of a Privately held Company
As you already know owning a privately held company has its advantages. Here are the topmost advantages that a privately held company has –
- Control & Autonomy: The first and the most significant aspect of owning a privately held company is having complete autonomy over operational decisions. Since you don’t need to worry about the regulations and what you need to adhere to, you can think long-term and concentrate on the things that would be good for the company in future rather than worrying about the next year’s profits.
- Non-disclosure rights: Owning a privately held company has its benefits. One of the most crucial is your non-disclosure rights. As an owner of a privately held company, you don’t need to adhere to any SOX or SEC regulations (other than in few cases). As a result, first, you would be able to focus on better things and second, the company doesn’t need to incur a huge cost of preparing the documents for SEC Regulation.
- The structure of taxation: In privately held companies, the owners can decide how they would structure the company. They can structure the company as a limited liability company or any structure that best serves the interest of the company. As a result, they can escape from paying double taxes and pay the amount lowest taxes possible (as per the statute).
- Confidentiality can be maintained: The public companies can’t keep their secrets. They need to disclose everything to the public because they’re bound by the SEC Regulation. But privately held companies can keep their confidentiality and don’t need to disclose legal settlements, employee compensation, and other confidential information.
- Almost no issues regarding litigation: Public companies disclose all. As a result, they’re more vulnerable to lawsuits. On the other hand, privately held companies don’t need to disclose their legal matters or any sensitive information; as a result, they can skip the issues regarding litigation by all means.
Disadvantages of a Privately held Company
There are not many disadvantages of private companies. But it has a couple of demerits.
- Limited Capital: It’s not easy to source share capital for a privately held company. If you’re sole proprietorship company or a limited liability partnership company, your chances of sourcing capital are You can find out some private backers (if they’re interested) and then source capital via private placements.
- Unlimited responsibility/liability: As you know there’s no separate entity for a sole proprietorship business and the sole proprietor. That’s why as a privately held business owner you have all the responsibility/liability for If there are any law-suit and the court’s verdict is against you; the court may take your personal assets beyond the assets of your business.
When does a Private Company need to Adhere to SOX/SEC Regulation?
We just mentioned that a privately held company doesn’t need to adhere to any SOX/SEC regulation. But that’s not always true.
In some cases, even a privately held company needs to adhere to few regulations. When a privately held company does business with a public company, then the privately held company needs to adhere to SOX regulations. However, the regulations that a public company needs to adhere to is always much more than a private company. That’s why often, few private investors can delist a public company and turn it into a privately held company for more freedom, autonomy, and fewer regulatory barriers.
Why Private Companies Remain Private?
We can see giant companies like Dell and Mars remaining private. Why then remain private when they can easily become public and raising money becomes easier? It’s because to conduct an IPO, a corporation needs to invest huge money which a privately held company may not want to invest. At the same time, privately held companies can align its business objectives around its mission which is always an afterthought for a public company.
This has been a guide to Privately held companies. Here we discuss types of private companies, its advantages, and disadvantages & when they have to adhere to regulations. You may also have a look at the following articles to learn more about Corporate Finance –