What is the meaning of privately held corporation?

A privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and hence a limited number of shareowners. In contrast, non-governmental organizations or private individuals shall also hold the owner. These shares are not traded on stock exchanges for the general public; hence such companies are closely held companies.

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 SOXSOXThe Sarbanes-Oxley Act (Sox) of 2002 was enacted by the US Federal Law for increased corporate governance, strengthening the financial and capital markets at its core and boost the confidence of general users of financial reporting information and protect investors from scandals like that of Enron, WorldCom, and Tyco.read more 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 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 them.

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 company’s long-term future rather than worrying about the next quarter’s profit figure.

Table of contents

• What is a Privately Held Company?
  • Types of Privately Held Companies
  • Advantages
  • Disadvantages
  • When does a Private Company need to Adhere to SOX/SEC Regulation?
  • Why Private Companies Remain Private?
  • Recommended Articles

Key Takeaways

• A privately held company is a separate entity registered with the SEC (Search Corporation) and has a small number of outstanding shares.
• A privately held company has three types: Sole proprietorship, partnerships, and limited liability company (LLC). 
• Such a company comes with perks such as autonomy of the owner, non-disclosure rights, privately controlled taxation, and maintaining confidentiality.
• Privately held companies like Dell haven’t released their IPOs due to the possibility of misaligned objectives. 

Types of Privately Held Companies

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• Sole Proprietorship: The first type of private company is the sole proprietorship. A sole proprietorship company doesn’t have a separate entity. It’s the same as the entity of the person. As a result, the company owner gets 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 liabilityUnlimited LiabilityUnlimited liability refers to the legal commitment of business owners to be accountable for all business debts if the firm's assets cannot meet its debts or liabilities. In other words, the owners' liability to the business is unlimited.read more and at the same unlimited autonomy to make decisions.
• Limited Liabilities Companies (LLC): This is another privately held company. 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 incorporating.

Advantages

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 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 a 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 to structure the company. They can structure the company as a limited liability company or any structure that best serves the company’s interest. As a result, they can escape from paying double taxes and pay the lowest taxes possible (as per the statute).
• Confidentiality can be maintained: Public companies can’t keep their secrets. They need to disclose everything to the public because the SEC Regulation binds them. 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 tell 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.

• Limited Capital: It’s not easy to source share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more for a privately held company. If you’re a sole proprietorship company or a limited liability partnership company, your chances of sourcing capital are to find some private backers (if they’re interested) and then source capital via private placementsPrivate PlacementsPrivate placement of shares refers to the sale of shares of the company to the investors and institutions selected by the company, which generally includes banks, mutual fund companies, wealthy individual investors, insurance companies.read more.
• 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. If there are any lawsuits and the court’s verdict is against you, the court may take your 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 a few regulations. For example, 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 are 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? To conduct an IPO, a corporation needs to invest huge money that a privately held company may not want to invest. At the same time, privately held companies can align their business objectives around their mission which is always an afterthought for a public company.

Frequently Asked Questions (FAQs)

What can be the examples of privately held companies?

Companies such as Mars, Ikea, Dell, Cargill, and Facebook have been privately owned. However, most companies in this category are small businesses.

Can privately help companies have shareholders?

Privately held companies can issue shares and have shareholders but can not trade on public stock exchanges and do not need to fulfill the Securities and Exchange Commission’s requirements.

How large can privately held companies be?

In the United States, the Securities Exchange Act of 1934 limits the number of shareholders in a privately held firm to under 2000.

What is the biggest privately owned company?

The largest private owned company in the United States, by revenue was Cargill. In 2021, they had a revenue of 134.4 billion U.S. dollars.

Recommended Articles

This has been a guide to privately held companies. Here we discuss types of private companies, their 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 –

What is the meaning of private corporation?

What is the meaning of privately held?

What is an example of a private corporation?

What is the difference between public and privately held corporations?