The Difference Between Private and Publicly Owned Companies
In the business world, two forms of ownership of a company, public or private, require different approaches to succeed. One is owned by a single person or a small group of people, and the other is owned by shareholders on the stock exchange. For example, all decisions are made by the executives of the company with the company’s best interest in mind, but the other is made by executives with the approval of the shareholders each have their own pros and cons and are both viable options for running a business
The largest difference between these two business plans is the actual ownership of the company and who makes the executive decisions. In a private company the owner or group of owners oversee the executives of the company. All the important decisions are made by the executives with the approval of the owner. If the owner doesn't like a proposal from an executive it is denied and terminated or sent back for reconstruction. In a recent interview with Chad Skiles ,the CFO of a private oil and gas company, he explained how the two forms “follow similar paths in regards to the decision making.” Essentially the only big difference is that in a public company there are shareholders involved. The book The Law, Corporate Finance, and Management defines the shareholder as the owners of the company “through their ownership of its stock,” however “the power to manage is vested in the directors.” Skiles explained how, in a public company “shareholders elect the board of directors who intern oversee the executives.” The executives are the ones who make the big decisions with the approval of the board who have received the approval of the shareholders.
The two forms of ownership come with their own unique advantages. Some advantages of the public company include the liquid state of the company, as well as the value of the company being set everyday. When a company is liquid it means that that company can be sold and drained of its assets essentially at click of a button. Skiles explained it as if the shareholders of the company all woke up one day and “decided to sell all their stock that company would ceased to exist.” All the money would be returned to the stockholders and the company would be terminated. For an investor this is a very viable business plan because at any time he or she may sell as many of their shares as they want and receive money for the worth of each share. Along with the company being liquid a private company has a set value each day. Every day as stocks are traded the market cap of a company increases or decreases. The Financial Industry Regulatory Authority or FINRA define market cap as “the total value of a company's outstanding shares of stock.” at the end of each day a new market cap is calculated and displayed for shareholders to see. This market cap allows for shareholders to see the undisputed value of a company immediately.
Private companies have their own advantages some include, fewer and easier regulations and cheaper cost of running the company. When it comes to private companies there is no major governing body to provide strict regulations like there is for public companies. For example private companies are “able to report their numbers in any accounting base they want to,” according to Skiles “while public companies must report in the for of US GAP. Tax and Cash are a couple of forms of accounting that companies may use. “These forms can be easier to calculate as well as more attractive to investors or buyers” explains Skiles. Furthermore private companies are simply cheaper than public companies. In order to be public companies must hire a plethora of different positions each tasked with different involvements in the regulation, reports and communications required of a public company. Private companies do not have to pay for any of these positions.
While both of these have their own advantages they also have their own disadvantages
For starters public companies are regulated by the Security and Exchange Commission or, SEC. According to there website the SEC was created in “1929... to enforce enacted the federal securities laws,” created by congress. Skiles clarifies “While these rules are meant to protect investors they can cause a lot of stress on a company and the executives as the struggle to meet the strict standards.” If these standards are enforced by federal law and if they are not followed a company may be terminated and its executives charged with jail sentences. It can be very risky to run a public company for even the slightest hiccup could have torrential consequences.
While a private company does not have the regulations of a public company they still have some disadvantages. The greatest disadvantage is that the value of a private company is not liquid, meaning, a company owner can not decide to sell their company whenever they want to. This is because there is no set value on the company. There is no daily calculation to determine a private company's worth like there is for public. Because a private companies value is not liquid and there is no set value another weakness is the long strenuous process of agreeing with a buyer on the price of the company. This process can take weeks, even months and in the end the seller may have sold the company for lower than what they wanted, or the buyer may have spent more than he or she initially intended. In perspective both of these companies have their own restrictions that cause disadvantages for their own companies.
In the massive world of business the two pathways have their own strengths and their own weakness. They are two completely different forms of business and they are both viable options. From the decision making to the sale format both companies are their own unique path.
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- The Difference Between Private and Publicly Owned Companies