Why Companies Stay Private

Some of the largest and most powerful companies in the world were created by raising capital in the public markets. Oil companies, utilities, food and beverage, and technology companies have all accessed the public market to fund their day-to-day operations and grow their businesses.

By selling all or part of a business in a public offering, companies that go public receive an immediate influx of capital. While this might appeal to some companies, others understand that public ownership comes at a price. By choosing to stay private, they do not have to report to a large group of shareholders and are able to keep their business plans and finances private.

Key Takeaways

• Some companies may choose to remain private rather than go public.
• Private companies aren’t subject to strict financial reporting requirements like public companies.
• Remaining private means having more control and flexibility when it comes to the future of the company.
• Private companies can still access capital through lenders and private sources rather than on public exchanges.

Looser Reporting Requirements

Many companies choose to stay private because it gives them some degree of financial privacy. Private companies aren’t required to disclose information about their financial position like public companies because there aren’t as many regulations.

For example, a private company is not subject to the same Securities and Exchange Commission (SEC) rules as public companies. These regulations require public companies to file annual reports and agree to third-party auditing of their financials.

Most investors know all about the glossy annual reports that contain extensive information about a company’s finances. Private companies do not need to produce them or disclose important information about their finances to the public. While they must practice accurate and current accounting, they don’t need to meet the stringent and complex accounting rules and standards applied to public companies.

Having said that, private companies must file certain documents to begin operating. These include registration documents and articles of incorporation in the state where they operate.

More Control

Staying private allows owners and key stakeholders to retain more control over their companies. Unlike public companies, there are no shareholders who may put pressure on management to take the company in a certain direction or make decisions to improve profits.

More control means a greater degree of flexibility to take action for the long-term advancement and growth of the company. Rather than succumb to the pressure of shareholders, owners are free to ensure their vision for the company is executed. By issuing equity shares to investors, public companies dilute ownership and, therefore, give up control.

Important

Since their shares aren’t traded on the open market, private companies aren’t necessarily subject to hostile takeovers.

Accessing Capital

Private companies cannot raise capital in the public markets by issuing shares to the public. Rather, they can access it through other sources like bank financing. Established private companies have relationships with their banks and can tap into loans and commercial lines of credit when needed. The companies can also use their assets or inventory as collateral to secure financing.

Private sources can also provide these companies with the capital they need. Venture capital and private equity have become very common ways for private companies to raise money to fuel their growth and meet their short- and long-term objectives.

Private companies can also raise capital by offering stock ownership to outside parties or employees. The value of a private company’s stock is determined by private valuation. Some companies carry the stock at cost on their books, while others may use a different valuation method. Investors who own stock in a privately held company must be prepared to accept the valuations and terms that companies dictate.

When to Go Public

Startups typically become established as private entities using capital from the owners or outside investors, cash generated from the business, and bank loans. When the company’s growth or survival requires more capital than those sources can offer, it may decide to sell all or part of the business by offering its stock to the public. By doing so, companies become subject to greater scrutiny by regulators and shareholders.

Company founders or other major shareholders may be willing to sacrifice some control and privacy to access large amounts of capital they couldn’t access otherwise. They can use publicly traded stock as a form of currency for purposes that would normally require large amounts of cash, such as purchasing other companies or compensating officers.

Offering stock to external investors usually comes before going public, and the purchasers are often venture capital sources. A company may go public gradually by offering stock to employees, incentivizing them while raising capital. United Parcel Service (UPS) remained private between 1907 and 1999, compensating and selling private stock to its employees. While the majority of the first shareholders probably didn’t fully recognize the value of their shares, they found out when the stock was determined by public demand.

Can I Invest in a Private Company?

You usually can’t invest in a private company as an ordinary investor because its shares aren’t sold on public exchanges. But, that doesn’t mean you can’t make an investment in this type of company. If there is a private company that interests you, you may provide it with startup capital or, in some cases, provide funding if the company has a crowdfunding campaign.

What Is the Largest Private Company in the U.S.?

Cargill is the largest private company in the United States. The Minnesota-based company, which produces and distributes agricultural products, topped Forbes’ list of the country’s top private companies in 2024. It was founded in 1865 and employs roughly 160,000 people.

Is It Better to Be a Private or Public Company?

This depends. Private companies have more control and flexibility when it comes to their short- and long-term goals because they don’t have to answer to public shareholders who are usually hungry for profits. Since they don’t issue public shares, ownership in the company isn’t diluted. Another key benefit for private companies is that they aren’t subject to the strict reporting requirements that public companies must follow.

Public companies, on the other hand, can access capital easily because they can issue shares on public exchanges. These companies also have greater visibility in the market because their products and services are known to a larger consumer base.

The Bottom Line

Most companies begin as private companies and many choose to remain as such. Looser reporting requirements, a greater degree of control, and continued access to capital can help a company’s owner decide against going public. But, going through the initial public offering (IPO) process and selling shares on an exchange gives companies instant access to large amounts of capital even though there’s more scrutiny by the SEC and shareholders. Regardless of whether they stay private or go public, company owners need to decide what sacrifices they’re willing to make for the future of their company.