The term private company could have a couple of different meanings, so it is often important to consider the context. A private company may be one that is simply owned by individual citizens, as opposed to being controlled, run and owned by a government. The term could also refer to a company that is not publicly traded on an open stock exchange, and therefore not subject to disclosure terms that many other companies in the public arena must abide by.
In some cases, to avoid confusion over these terms, an analyst or news reporter may use the term publicly traded, private company. While this is a good way of explaining that the company is not owned by the government but is publicly traded, it is often unnecessary because the context explains the term being used. Still, in cases where there may be confusion, making a distinction helps to remove all doubt in the minds of listeners or readers.
A publicly-traded company is often not considered a private company because it must make a number of disclosures in order to remain on an open stock market. This helps protect investors, who may otherwise not have access to this information. It also protects investors by allowing them to assume that the information is accurate. If a company knowingly provides false or misleading information in reports to the Securities Exchange Commission or other governmental agencies, civil and criminal penalties could result.
On the other hand, if a company is a private company, all that information remains proprietary. The reason is that the company does not need to divulge that information because it has little ability to harm investors. While there could be some risk, especially if that company seeks a small business loan, the assessment of that risk is left totally up to the lending institution. Most lending institutions have a strict set of guidelines they go by when lending to a private company.
Just because a private company begins its operation without offering stock does not mean that it never can. If a company decides to go public, it often does so by making an initial public offering. This is the transition from a private to public company. Once a company takes this step, reversing that trend back to a private status is extremely difficult.
There are a number of advantages and disadvantages to being a private company. One of the main advantages is that such companies are not subject to hostile takeover attempts by an individual or entity that tries to buy 50 percent (plus one additional share) of its stock. A disadvantage is that raising capital can only be done through personal investment or loans, which often means that the company cannot grow a quickly as one that is publicly traded.
