Public versus private companies

A public company has several advantages. It is able to raise funds and capital through the sale of stock and convertible bonds. This is the reason why public corporations are so important, historically; prior to their existence, it was very difficult to obtain large amounts of capital for private enterprises. It has the ability to offer stock and stock options to directors, executives, and employees as part of compensation. This is much less advantageous if the company is required to treat stock options as an expense. Large stockholders, typically founders of the company, are able to sell off shares and get cash which they can put to other uses. In contrast, while ownership in a private corporation can also be sold, in part, determining a "fair value" that is acceptable to all parties can be difficult.

A private company has several advantages. It has no requirement to publicly disclose much, if any financial information; such information could be useful to competitors. For example, Form 10-K is an annual report required by the SEC each year that is a comprehensive summary of a company's performance. Private companies do not file form 10-Ks. It is less pressured to "make the numbers" - to meet quarterly projections for sales and profits, and thus in theory able to make decisions that are best in the long-run. It spends less for certified public accountants and other bureaucratic paperwork required of public companies by government regulations. For example, the Sarbanes-Oxley Act in the United States does not apply to private companies. The wealth and income of the owners remains relatively unknown by the public.

The norm is for new companies, which are typically small, to be privately owned. After a number of years, if a company has grown significantly and is profitable, or has promising prospects, there is often an initial public offering and the company becomes public.

Less common, but not unknown, is for a public company to pay cash to its shareholders and become private. This is typically done through a leveraged buyout. Public companies can also become private when purchased by a larger company that is private.