What is the difference between a private company and a public company?

Understanding the ownership structure of a company is crucial in distinguishing between a private and a public entity. A private company is often likened to a tightly-knit family where ownership is held by a select few such as the founders, close associates, or family members. This concentrated ownership means significant control is maintained within a small group, typically allowing for quick decision-making and a high degree of privacy regarding the company's operations and strategy.

Conversely, public companies have a large family of owners, consisting of numerous shareholders that can include anyone from the general public who purchases stock through an exchange. These shares are spread far and wide and no single shareholder is likely to have a controlling stake unless it is an institutional investor or a founder retaining a substantial share. Subsequently, this dispersed ownership dilutes individual control and introduces the need for collective decision-making typically through a board of directors elected by the shareholders.

The benefit of such a structure in a public company is the ability to raise large amounts of capital from the stock market. However, it brings with it the challenge of balancing the interests of many stakeholders, each with a varying degree of influence and investment objectives.

A stock exchange listing serves as a significant dividing line between private and public companies. Private companies' stocks are like hidden treasures, not visible on the public radar, hence you cannot find them listed on stock exchanges such as the New York Stock Exchange (NYSE) or the NASDAQ. This means investors cannot simply buy a share of the company on the open market.

In contrast, public companies step into the spotlight with their shares featured on stock exchanges around the world. This exposes them to a vast audience of potential investors. Listing on a stock exchange provides a public company with liquidity, as shares can be easily bought and sold, and valuation, as the market determines the worth of the company based on the trading of its shares. It comes at the cost of fulfilling stringent requirements and abiding by the rules set out by the exchanges and financial authorities.

Due to the absence of public trading, private companies often face fewer regulatory burdens but also have limited access to capital through equity. They must find alternative methods of financing, such as private investments, loans, or venture capital.

The veil of privacy for financial information is noticeably different when comparing private and public companies. Private businesses operate under a shroud allowing them to keep their financial dealings and operational insights away from the public eye. The reporting obligations they face are considerably less demanding, primarily geared towards fulfilling tax obligations and providing information to a relatively small circle of investors and lenders.

On the other hand, public companies stand in a glass house with regard to financial disclosure. They are mandated by regulatory bodies like the Securities and Exchange Commission (SEC) in the U.S. to regularly publish detailed reports that cover everything from financial performance, such as income statements and balance sheets, to executive compensation and material corporate actions. These disclosures ensure transparency and provide investors with the necessary information to make informed decisions about buying, holding, or selling shares.

Public companies must adhere to standardized financial reporting frameworks such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), aimed at providing consistency and comparability for stakeholders. This level of scrutiny requires a significant investment in compliance infrastructure, but it also builds public trust and credibility, which are critical assets in the capital markets.