The key distinction between a private company and a public company is that shares in a private company may not be offered to the public. Private companies constitute the vast majority of companies and may range from one-man operations to sophisticated multi-national companies with a large number of shareholders. Also to be borne in mind is the close corporation (also closely-held corporation or close company or closed company) found in certain English-speaking jurisdictions, which is similar to a private company in that the shares may not be offered to the public, but differs in that it is subject to a maximum number of shareholders. Often, all or most of the shareholders in a close corporation participate in the management of the company and set corporate policy. Indeed, small close corporations more closely resemble partnerships than corporations. In some jurisdictions, a corporation must meet statutory requirements to qualify as a close corporation and must explicitly elect to call itself a close corporation. Close corporations are often small in terms of assets and fewer formalities are required in the corporate structure.
Public companies (Publicly held corporations) may offer their shares to the public. There are certain statutory requirements for a company to register as a public company, such as a higher minimum authorised share capital, and higher minimum number of directors and shareholders. A public company is also subject to further restrictions and accountability to shareholders. The advantage of being able to offer shares to the public is that it allows for an alternative source of equity finance and opportunities unavailable to a private company. A public company may go one step further and list its shares on a stock exchange. A listed company has an even larger and more accessible market on which the general public and financial institutions can buy and sell its shares. The public market for the shares may be a stock or other securities exchange or an over the counter (“OTC”) market among brokers. As a result of this public trading, public corporations are subject to stringent reporting and disclosure requirements under various securities regulations.
The key distinction between these corporate forms is the total number of shareholders and the existence of a public market for the shares. A disgruntled or dissatisfied shareholder in a public company may simply elect to sell its shares on a public market. Conversely, a shareholder in a private company may be contractually bound to sell its shares to other shareholders or simply have no other place to sell its shares except to other shareholders. This creates a number of problems, including the valuation of the shares. While public markets provide benchmarks for public companies, private companies often have no external measure by which to establish the value of shares. This can lead to situations in which minority shareholders are locked in to their investment as a result of not being able to sell the shares, and can subject minority shareholders to a squeeze out or freeze out, corporate actions which effectively force minority shareholders to sell their stake in the company.