What is a Public Company?
An organization whose shareholders are entitled to a portion of the firm's assets and revenues is referred to as a public company. It is also known as a publicly traded company. Ownership of a public corporation is divided among the public shareholders through the free exchange of shares of stock on stock markets or over-the-counter (OTC) marketplaces.
A corporation whose ownership is structured through shares of stock that are meant to be freely exchanged on a stock exchange or in over-the-counter markets is referred to as a listed corporation, public company, publicly held company, publicly listed company, or public limited company. Whether or not a public firm is listed on the stock market, making it easier to trade shares, determines whether it is publicly traded (listed company) (unlisted public company). Public corporations of a particular size must be registered on an exchange in several jurisdictions. Public corporations are typically private businesses operating in the private sector; the word "public" emphasizes their transparency and trading on open marketplaces.
Many Americans make direct investments in public corporations, and chances are good that the pension plan or mutual fund you own, if you have one, has some shares in public companies.
The U.S. Securities and Exchange Commission (SEC) classifies a business as a public corporation if it must disclose information to the public.
Understanding a Public Company
Most publicly traded businesses began as private ones. Owners of private businesses might be the founders, the management, or a collection of private investors. Additionally, there are no standards for public reporting for private enterprises. A company is required to be compliant with public reporting requirements once it meets any of these criteria:
An initial public offering (IPO) is the procedure used by a private firm to start issuing new shares to the general public. A firm is deemed private before its IPO. A company's decision to start issuing shares to the general public through an IPO is crucial since it gives them a source of funding for their expansion.
A firm must fulfil certain conditions to accomplish an IPO, including those set forth by the SEC and the rules established by the stock market authorities where they intend to list their shares. A company often hires an investment bank to advertise an IPO, select the share price, and choose the date of the stock issue.
In exchange for their earlier private investment in the firm, current private investors generally get share premiums when a company goes public. The Proctor & Gamble Company, Google Inc., and Chevron Corporation are a few examples of public firms.
Advantages of Public Company
Public corporations have some benefits over private corporations. Specifically, public corporations can access the financial markets and obtain money by selling stock or bonds for expansion and other purposes. A stock is a type of security that denotes ownership of a portion of a company.
Selling stocks enables a company's founders or top management to liquidate some of its assets or equity. A firm may also issue a corporate bond as a loan to obtain funds. When investors buy a corporate bond, they give the company money in exchange for several interest payments. These bonds may occasionally also be actively traded on the secondary market.
A firm must have attained a specific operational and financial scale and success level before switching to or going public. Therefore, having your stocks traded on a significant market like the New York Stock Exchange as a publicly traded corporation has considerable influence.
Since the company is typically legally required and naturally motivated (to raise additional capital) to publicly spread information about the financial condition and future of the company to its numerous shareholders and the government, the financial media, analysts, and the community can obtain additional data about the company.
A public corporation may be more well-known or well-recognized than a private company since many people have a vested stake in its success.
Public corporations are legally prohibited from acting in a way that might lower the stock price or refrain from acting in a way that could raise it due to their fiduciary obligation. Every publicly traded corporation aspires to perpetual growth.
Disadvantages of Public Company
Nevertheless, access to the public capital markets also entails more stringent regulatory oversight, administrative and financial reporting requirements, and corporate governance regulations that public businesses must adhere to. Additionally, it leads to less power for the corporation's founders and majority stockholders. Conducting an IPO comes at a significant expense as well.
Government agencies control obligatory reporting requirements that public corporations must adhere to and must continuously file reports with the SEC. Public corporations must comply with strict reporting guidelines mandated by the SEC. A Form 10-K, an annual financial report that provides a detailed account of a company's financial performance, is one of these criteria. They also include the public publication of financial statements.
Companies must also submit Form 10-Q quarterly financial reports and Form 8-K current reports if certain events occur, such as the appointment of new directors or the conclusion of an acquisition.
The Sarbanes-Oxley Act, a package of reforms designed to stop false reporting, introduced certain reporting obligations. Qualified shareholders also have a right to certain papers and notices on the corporation's operations.
A firm must answer to its investors after it becomes public. The shareholders choose a committee to manage the business on their behalf. Additionally, a shareholder vote is required for several actions, including mergers and acquisitions, corporate structure changes, and modifications. This means that many corporate decisions are subject to shareholder input.
The Securities and Exchange Commission in the U.S. mandates companies with publicly traded shares to disclose their main shareholders annually.
The reports list every institutional stakeholder (mostly corporations that own stock in other businesses), every corporate official with stock in the business, and anybody with over 5% of the company's equity.
For a long time, newly founded businesses were privately held. Still, they held initial public offerings to become publicly listed businesses or to be purchased by another business if they grew bigger and more successful or showed promise. Less uncommon, some businesses-like the investment bank Goldman Sachs and the supplier of logistical services United Parcel Service (UPS)-decided to stay privately held for a considerable amount of time after maturing into a successful business.
However, about 45% or fewer publicly listed businesses were on American stock markets from 1997 to 2012. One observer, Gerald F. Davis, claims that since the turn of the twenty-first century, "public firms have gotten less consolidated, less integrated, less networked at the elite, shorter-lived, less financially lucrative for regular investors, and less ubiquitous." According to Davis, technical advancements like the falling cost and rising power, quality, and adaptability of computer numerical control (CNC) equipment, as well as more recent digitally enabled tools like 3D printing, will result in a smaller and more regionalized structure of production.
A team of private investors or another privately owned firm can buy out the shares of a public corporation in a corporate privatization, sometimes known as "turning private", removing the company from the public markets. This usually occurs through a leveraged buyout and happens when the purchasers think investors have undervalued the securities. Public enterprises in serious financial trouble could occasionally request a private firm or companies to assume control and management of the business. Making a rights issue to allow the new investor to obtain a supermajority is one technique. The business might then be relisted or privatized with a supermajority.
A publicly traded business can also be acquired by one or several other publicly traded firms, in which case the target company either ceases to exist as a distinct entity or becomes a subordinate or joint venture of the purchaser(s), with the former shareholders getting compensation in the form of cash, shares in the acquiring company, or a mix of both. Deals are sometimes categorized as mergers when the primary form of remuneration is stock. De novo formation of subsidiaries and joint ventures is another option, and it frequently occurs in the financial industry.
Although they are not publicly traded firms' subsidiaries and partnerships are often not regarded as privately owned businesses; they must adhere to the same reporting standards as publicly traded corporations. Last but not least, companies that sell their shares in this way are known as spin-outs, and shares in subsidiaries and joint partnerships may be (re)offered to the public at any moment.