Privately Held Company

What is a Privately Held Company?

Privately held company refers to the separate legal entity which is registered with SEC having limited number of outstanding share capital and hence limited number of shareowners whereas the owner shall also be held by either non-governmental organizations or private individuals and these shares are not traded on stock exchanges for general public hence such companies are closely held companies.

Being a private company has its benefits as well as disadvantages.

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

Privately-Held-Company

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Source: Privately Held Company (wallstreetmojo.com)

Advantages

As you already know to own 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 the 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

There are not many disadvantages to private companies. But it has a couple of demerits.

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 a 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 –