Outline and discuss the distinction between a private and a public company highlighting the advantages or disadvantages of either.

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kipling2448 eNotes educator| Certified Educator

The distinction between public and private corporations is one of ownership and control. A privately-owned business is just that: a company owned and operated by an individual or group of individuals who individually or collectively make all major decisions pertaining to the company’s direction and strategy. They are beholden to nobody but themselves and, in the case of businesses employing unionized labor, whatever union is involved (e.g., United Steel Workers, International Brotherhood of Teamsters, Service Employees International Union, etc.).

A publicly-held or traded corporation is owned by its shareholders. The more shares of stock an individual or group of individuals hold in a particular publicly-traded company, the more influence they wield in discussions of the company’s future direction, whether to invest profits in recapitalization vice issuing monetarily greater dividends, and other major decisions. Publicly-traded corporations fall under a federal regulatory structure that does not apply to privately-owned businesses, such as the Securities and Exchange Commission’s watchdog mission of monitoring publicly-held companies for indications of “insider trading.”

The advantage to privately-owned companies is the absence of a large group of mostly anonymous people involved in major corporate decisions and in the ability of ownership to retain control of all profits. Contrast this with the requirement of publicly-traded corporate officers to issue profits in the form of dividends to shareholders. A disadvantage to privately-held companies, on the other hand, is their more limited avenues from which to raise money for new product development, physical plant expansion, and other routine but expensive endeavors. Publicly-held companies have the option of selling more shares of stock as a means of raising capital while continuing to have the option of applying for loans through banks and other financial institutions. Additionally, as noted above, privately-owned companies are not subject to the level of scrutiny imposed upon publicly-traded corporations.

There are advantages and disadvantages to both forms of corporation. Privately-owned companies often find it difficult to expand beyond a certain level without the kind of cash that can only be raised through public sales of shares in the company. Publicly-held companies, on the other hand, have far more cumbersome decision-making processes by virtue of the vastly greater number of “owners” involved.