What is the Difference Between a Public and Private Corporation

What is the Difference Between a Public and Private Corporation

Public corporations differ from private corporations in many ways. If we study the characteristics and salient features of these companies, we will understand the difference between them easily.
BusinessZeal Staff
Last Updated: Apr 9, 2018
Companies are generally classified as proprietary firms, private companies, and public companies. While proprietary firms have a single proprietor who looks after the business, private firms can have some members who sit on the board and run it. Public corporations, on the other hand, are listed entities which have full-time board of directors consisting of a chairman, chief executive officers, managing directors, chief financial officers, independent directors, and audit professionals.

Private Corporations

A private company is held or controlled by the founders or promoters of the company. A privately held corporation can start its operations once it gets incorporated. It is not listed on the stock exchange and hence cannot raise funds through equities. One of the biggest advantage for a private company is that such a company does not have to show its financial information to the public. It is not answerable to shareholders like in the case of a public corporation.

In a private corporation, the management has total control over the company's operations and it can take decisions in favor of the organization without much consultation with parties like major shareholders and stakeholders. So, the chances of an investment proposal getting rejected because of non-approval by sources related to the company are zero. Private companies are not allowed to offer their shares to the public unless they complete the formalities and listing process. Many people think that private companies are always very small as compared to public companies. However, this is not true as there are private companies that are earning millions of dollars in profits every financial year.

Public Corporations

A public corporation is a business entity which is listed on the stock exchanges of the United States. This is a company which has sold a part of its stake to the common public through an Initial Public Offering (IPO). So, it has many shareholders and it is mandatory for a public company to declare its source of funds, financial statements like balance sheets, its current debt, audited accounts, and information about its expansion plans to the shareholders and securities commission. The advantage that public corporations have over private corporations is that they can easily raise money to fund their expansion plans.

A public company has to give details about the salaries paid to top-level management. A public corporation can allot shares to its employees under employee stock options as per the designation/post of the employee. Apart from the senior management, a public company can have independent directors who give vital inputs for achieving fast growth. The shares allotted to the public can be of two types; ordinary shares and preference shares. The corporation has to pay a fixed dividend to preference shareholders and their money needs to be returned first in case of winding up of the corporation. However, preference shareholders do not have voting powers. Ordinary shareholders are the real risk bearers of a public corporation, and they are not entitled to fixed rate dividends. However, they enjoy voting powers in their company. Restrictions on transfer of shares are not applicable in case of a public company like in the case of a private company.

Public corporations have to take shareholder's approval before making major investment decisions, mergers, and acquisitions or stake sale. In case the shareholders do not approve of the investment plan, the management may have to reject it. The level of business secrecy is absent in this type of organization as in private corporations.

Publicly listing a company on the exchange can help raise capital and when desired increase the returns for the shareholders. Apart from the IPO route, reverse merger process is adopted to make a company public, by acquiring a public shell company with zero assets and liabilities.