What is a Private Corporation?

January 29, 2021
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One of the biggest distinguishing factors between various corporations, and companies more broadly, is whether or not they are publicly traded. A company that is not publicly traded is private, whether or not it is incorporated. This could be a private corporation, LLC, partnership, etc. When a private corporation “goes public,” this is through an initial public offering (IPO) or Direct Listing, enabling the public to buy shares of the company. 


Colloquially, the terms “private corporation” and “private company” are used interchangeably. Although, this sometimes leads to confusion. “Private company” is a term that often refers to a “closely held corporation” (which is its own separate entity).


In the sections below, we’ll break down what is a private corporation from all angles.


Private vs Public Corporations: What’s the Difference?

For start-ups, companies are private by default. When forming a corporation, the company must file articles of incorporation (or organization) and designate the companies’ shares to one or more private owners.


As the business grows, its owners may make the decision to go public, opening up the company to any prospective shareholders who want to buy partial ownership. Benefits include:


  • The ability to raise a lot more money or create a higher valuation in the public markets than in the private markets 
  • Providing an exit strategy for early investors 


Since going public distributes ownership to new shareholders, the amount of control the original owners hold over the company can be limited by new owners’ influence. Keeping a company private is one of the only ways to guarantee complete control stays with the original owners of the company. In addition, preparing for an IPO is expensive and can take a long time. 


To avoid these burdens, companies may elect to remain private indefinitely. 


Comparing Common Corporate Structures

As mentioned above, another distinction between companies is whether they are incorporated or not. “Incorporated” companies are corporations, as the name suggests. Corporations carry far stricter formal requirements than unincorporated companies. Their articles of incorporation must name directors and officers and detail the bylaws by which the company will schedule meetings—all of which needs to be documented. These restrictions generally apply to all corporations, private or public.


The two main corporate structures that most corps fall into are:


  • C corp – C corps can be private or public. They offer complete separation of the business’ assets and their owners’ finances. This results in limited liability for the owners. However, this also results in “double” taxation, whereby corporate profits are taxed, then taxed again as they are distributed to shareholders’ own income.


  • S corp – Corporations that carry S status are not beholden to the “double” taxation; profits and losses may “pass through” to owners’ personal taxes, instead. To qualify as an S corporation, there can be no more than 100 shareholders, all of whom must be US citizens, among other restrictions. 


In addition, other niche business ownerships include:


  • B corp – Benefit (B) corps, unlike regular C or S corps, are driven by more than just accumulation of profit. In addition, they must have a mission that holds the company accountable to produce a public benefit. There are no particular tax or legal benefits. Instead this status boosts public reputations and can provide certain “conscious investment” advantages.


  • Nonprofit – A nonprofit is similar to a B corp in that it is driven by its mission, typically in areas like education, religion, and cultural affairs. However, this mission is the only focus of a nonprofit, as these corps by definition do not exist to generate profit for shareholders.


  • Closely held corp – A private company, also called “closed” or “close” corp, is a non-publicly traded company with relatively few shareholders, all of whom are typically closely involved in the business. About 400 companies in the US are closed corporations, including Koch Industries, Deloitte, and Mars. More on this special business entity below.


Whether your corporation plans to be private or public, it will begin as a C corp by default—unless it qualifies for S, B, or other status. These corps can be public or private, and will be private until they go public, if they do. The exception is closed corps, which are a private enterprise by definition.


Unincorporated Private Companies 

Corporations aren’t the only kinds of business structures available to you. There are also unincorporated structures to consider, especially for a small- to medium-sized business, including:


  • Sole proprietorship – The simplest structure, a sole proprietorship is a business led by just one person. This is the default structure your business takes, even if you do not formally launch your business. There are no formal requirements, and thus no liability protection, as personal assets are not separated from business finances.


  • Partnership – A partnership is a simple business organization for two or more individuals. Liability may be limited for one or more partners in a limited partnership (LP) or for all partners in a limited liability partnership (LLP). Profits and losses generally pass through to personal taxes for this business entity. 


  • Limited liability company (LLC) – An LLC offers some of the same legal protections as a corporation, along with the flexibility to pass profits and losses to your personal taxes. An LLC also requires fewer formalities, relative to corporations.


There is also room to mix and match features of these structures with the corporate ones, which we’ll address below. For example, you could have an LLC taxed as a C corporation. Plus, you can also generally convert a business into a corporation, although limitations apply depending on local laws. Typically, “going public” involves conversion into a corporation first (or LLP).


Private Company or Closely Held Corporations

Taken colloquially, a private enterprise can refer to any non-publicly traded business. Taken formally, a private company is also referred to as a closely held corporation.


A closed corporation is a unique corporate structure, distinct from the more common C and S corporations. Most corporations are, by definition, rigidly structured. But closed corps aren’t necessarily beholden to the same rules. Per the SBA’s business structure guide, many of these formalities can be disregarded for a closed corporation.


A closed corporation is owned by a small group of shareholders. Its shares are not made publicly available, and in some cases, shares are actually banned from public trading. Much of the formal structure in place for corporations is meant to accommodate the hundreds upon thousands of potential shareholders, all of whom have a say proportionate to their holdings.


With a closed corp, these restrictions are thus not necessary.


Tax obligations and liabilities for closed corps are the same as those for other corporations. As a default, they are taxed like a C corp, meaning that a “double” tax occurs. But a close corp may also qualify as an S corp, which enables profits to “pass through” to owners’ personal taxes.


For this reason—and for control—many successful companies are private companies. For example, Forbes’ list of top private companies includes many well-known successes, like the aforementioned Koch Industries (valued at $115 billion dollars) and Cargill ($114 billion dollars).


Power Your Private Corporation with Ramp

One of the most important ways to power your business, whether a private corp or any other structure, is with the right corporate card. With the Ramp card, you can spend on your own schedule, gain visibility into your finances with automated spend management and real-time visibility, and save 1.5% cash back on every purchase made.


Ramp is here to power your business, no matter what structure you choose.


Sources

The Balance

The Balance

Forbes

Houston Chronicle

Houston Chronicle

Investopedia

Investopedia

Law Plus Plus

LegalNature

PwC
Small Business Association

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