A publicly traded business is any business that is traded on a public exchange. This means that the company has gone through an initial public offering in which its shares were registered with the Securities and Exchange Commission and subsequently listed for sale to the public at large. A publicly-held or publicly-traded company is generally held, or capable of being held, by a large number of unrelated people.
Some companies choose to remain closely-held instead of seeking a large and diverse set of owners. Other companies prefer to be widely held and often undertake a public offering as part of that effort.
Can you think of reasons why a company would prefer to remain a closely-held private company versus a widely-held public company? Can you identify a very large closely held company that does business across the United States? Can you identify why the company is considered, closely-held. Both public and private companies must have:. A public company is one that has sold a portion or all of itself to the public through an initial public offering IPO.
This means the shareholders have a claim to a portion of the company's profits and assets. Before shares are sold through an IPO, the corporation should register them with the U. They need to also prepare a prospectus that has all important information disclosed about the company and all the shares they're offering. Once this is issued, the public corporation stock can be traded on the stock exchange, assuming the company meets all mandatory listing requirements for the exchange.
A private corporation's stock is not allowed to be freely traded to the public. A private corporation needs to rely on any exemptions to the requirements for SEC registration to place shares with wealthy individuals and institutional investors privately.
Public companies have an advantage of getting into the financial market by sell bonds debt or stock equity to increase capital, such as cash, for projects and expansion.
Once the company gets listed, investors can move in and out of stock by selling and shares trades on the stock exchange. If more funding is required for a public corporation, it can give out extra common shares via a secondary offering. Disadvantages of a Closely Held Corporation Despite the above benefits, a closely held corporation also has some drawbacks, including: Raising capital.
It is more difficult to use share equity to raise funds, since the shares of a closely held corporation are not listed on a public stock exchange for investors to purchase. Instead, most closely held corporations achieve funding goals by generating profit and through contributions of capital from its shareholders.
Sale of shares. Individual shareholders may face difficulties if they wish to dispose of their shares in a closely held corporation. Not only are the shares not listed on a public stock exchange, but the shareholder agreements of most closely held corporations contain restrictions on the transfer of shares.
Fiduciary duty. Because a closely held corporation is still a corporation, those who control its management are held to a higher standard of duty to the company, known as fiduciary duty. This legal term refers to the managers' obligation to make decisions that are in the best interests of the corporation rather than their own personal interests.
Taxation of a Closely Held Corporation Like any other corporate entity, if a closely held corporation meets IRS conditions for S corporation status, it can elect to be taxed as an S corp. Ready to start your Corporation? Contents 4 min read Ready to start your Corporation?
About the Author Belle Wong, J. Related Topics. Facebook Twitter. This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law. You may also like. Forming Your Corporation Overview of a Close Corporation In some states, you may be able to form your business as a statutory close corporation, which can be beneficial from a tax perspective.
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