Why Companies Stay Private?
Many of the companies that were created in past as private ones are now converted to public companies. It is due to the massive capital influx they receive as the shares are purchased by the people. Today most successful companies are receiving funds in huge amounts to cover their day to day expenses occurring in daily operations and thus enlarging their businesses.
Many powerful companies including the companies of utilities, oil, technology, food, beverages etc. sell all or some of their parts to a public offering and lose their private status. This is an excellent opportunity for companies in the sense that they can raise their capital but this does come with a price.
In contrast to these mentioned companies, many companies prefer to stay private so that they don’t have to answer all these so many shareholders. By staying private companies can retain their plans and finances to themselves and do not need to share every information publicly.
How to go public?
When a business first starts, it fulfills its cash requirements from its owners and investors. If the cash requirement is more than those provided by owners, the companies can take capital from outside investors, loans from banks and self-generated cash. However, when the capital requirement further exceeds, the company sells all or some of its parts to the general public and hence become a public organization and the subject to many questions by the new shareholders.
The privacy and control of company can easy be traded with large capital access by owners, which would not be obtain otherwise. Normally where large amount of cash is required, these companies use stocks which are publically traded for the purposes such as compensation of officers or purchase of other companies.
How to stay private?
Many companies prefer to go public because of the large amount of capital they get, still many companies find the benefits of going public are outweighed by its adverse results. The charm of getting capital in large amount does not lure the owners when they are faced by excessive scrutiny. And this is one of the many reasons that the companies often avoid reporting by staying private.
An annual report of a company contains all the information and details about the financing of the company on a yearly basis and it is provided to all the shareholders in a publically traded company. While that differ to private companies which do not require to make such reports and their information and details of finances are not the topic of concern for public. They get their information to themselves and allow no external’s interference. Though the private companies must keep record of their finances and get their facts accurate, they need not to follow the general rules for accounting and general standards which the public companies strictly follows.
Though the decision of staying private deprive the companies of getting capital from public stock markets, they sure have other means of getting their requirements fulfilled of which one source is financing through banks. The companies which are doing business for a long period of time, develop long term relationships with banks and other financial institutions and easily get the line of credit whenever they need. Such companies are also able for applying for loans by pledging their inventories and assets.
How to invest in a private company?
Private companies when in need of capital, allow stock ownership to public and get capital. Private valuation method is used for the valuing of private stocks. Some stocks have their values written on companies’ books, whereas others require valuation method. The investors who are willingly investing in a private company have to follow the terms and conditions of these private companies.
Offering stocks to outside investors for the purpose of raising funds may cause the risk of going public for companies who prefer to stay private and the sources of these external purchasers are venture capital. While offering incentives to employees or compensation, company gives its stocks and gradually becomes private. This will encourage the employees to focus on their work and devote their efforts towards one goal.
What actually is a private company?
A company whose ownership is private is private company. It has shares but these are not traded in public offerings. These firms have limited sources of generating capital but they are free of disclosing their internal finances and therefore are save from objections by large number of shareholders. These businesses have less liquidation and are hard to value.
There are different types of private companies, which are:
- Sole proprietorship (only 1 owner with unlimited liability.)
- Partnership (more than 1 owner with unlimited liability)
- Limited liability corporations ( multiple owners with limited liability)
- S corporations (the profits are not taxed and the no. of shareholders is not more than 100)
- C corporations ( these are double taxed and can have unlimited no. of shareholders)
All these types of private companies have their own specific set of rules for their members, shareholders and the taxation.
Why staying private?
Many companies who are private at start become public in order to get maximum capital however as a result they face an extreme scrutiny by shareholders. Though there are reasons because of which companies prefer to remain private, these are
- For the undertaking of IPO (initial public offering) there is a large cost to be bear.
- For the company which is owned by family for generations, the owners are determine to keep it private.
- To avoid the disclosure of secret information and finances.
- In order to become a public company, it has to be undergone by many process, each of which require fees.