Privately Held Company (Encyclopedia of Business)
A company may be publicly owned or privately owned. In the case of a privately owned, or closely held, company, all of the stock is concentrated in the hands of a few individuals. When the privately held company first issues its stock, it is not offered for sale to the general public. On the other hand, the stock of a publicly held company is offered to the general public for sale. A privately held company may decide to "go public." That is, it may make a stock offering to the general public in order to raise capital. The first public stock offering of a company is known as its initial public offering (IPO).
In order for a company to be privately held, it must be organized as a corporation. A corporation is a legal form of business that is established by a corporate charter granted by a particular state. The corporate charter establishes the corporation as a separate legal entity from its owners. The corporation is said to be a "legal person" and may enter into agreements, make contracts, and sue or be sued.
The owners of a corporation, whether public or private, are its common stockholders. There are two types of stock, common and preferred. Preferred stockholders generally receive a stated dividend of a specific amount. Common stockholders receive a dividend based on corporate profits, although in some cases common stock pays no dividend. The corporation's charter specifies how many shares and what types of stock it is allowed to issue. While both preferred stockholders and common stockholders are investors in the corporation and provide it with capital, it is the common stockholders who actually own the firm.
In a privately held corporation, the owners and managers may be the same individuals. In the case of a small grocery store organized as a corporation, for example, it would not be uncommon for the owners of the store to also run it. The president of a small manufacturing firm that is privately held may be the sole stockholder or hold a majority of the stock.
The corporate form of business organization allows a distinction to be made between a corporation's owners and its managers. In a large, privately held corporation, the shareholders who own the firm are likely to be different from the managers, executives, and directors who run the firm. In that case, the company's board of directors would be responsible for running the corporation to maximize profits for the shareholders. The directors may themselves be the sole shareholders. In practice the corporate directors establish corporate policy, make major decisions, and hire managers and others to oversee the daily operations of the corporation. Shareholders can express their satisfaction or displeasure with the board of directors of a corporation by voting them in or out of office.
Whether publicly held or privately held, corporations provide their owners with a degree of limited liability. The shareholders of a publicly held corporation may lose their investment in a company, but they have no personal liability beyond that. The same is also true for privately held corporations. If an owner of a privately held corporation, however, is also actively engaged in managing and directing the operations of the company, then he or she may be held personally liable in a lawsuit against the firm. The concept of limited liability still applies to some extent in that situation, so that in the case of multiple owners or shareholders, one shareholder is not personally liable for the wrongdoings of another shareholder. A parallel situation exists for publicly held companies, where a company's directors may be held personally liable for specific cases of wrongdoing.
Unlike publicly held companies, privately held companies are not required to make public their profits and other financial results. Of course, they are also not able to raise capital by selling shares of stock to the general public. Successful and relatively young privately held companies often attempt to facilitate their growth by becoming publicly held companies and making an IPO. It must be remembered, however, that not all privately held corporations are small; there are some very large corporations that remain privately held, such as Levi Strauss & Co. and Hallmark Cards, Inc.
SEE ALSO: Closely Held Corporations; Going Public; Preferred Stock
[David P. Bianco]
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