Public company

From Wikipedia, the free encyclopedia

A public company usually refers to a company which is permitted to offer its securities (i.e., stock, options, bonds, etc.) for sale to the general public, typically through a stock exchange. Typically, the securities of a public company are owned by a large number of investors while the shares of a private company are owned by relatively few shareholders. However, a company with a large number of shareholders is not necessarily a public company. In some instances, companies with over 500 shareholders may be required to report under the Securities Exchange Act of 1934. Companies that report under the '34 Act are generally deemed public companies.

The term "public company" may also refer to a government-owned corporation. This meaning of a "public company" comes from the tradition of public ownership of assets and interests by and for the people as a whole, and is the less-common meaning in the United States. See public ownership.

The first company to issue shares is thought to be the Dutch East India Company in 1602.

"Publicly owned company" can also have either meaning, although in the United Kingdom it will usually refer to ownership by national, regional or local government.

1 United States of America
2 United Kingdom
3 Public versus private companies
4 Trading and Valuation
5 See also
- 5.1 Compare

[edit] United States of America

The de jure definition of a public company in the United States is: A public company is any company that files a Form S-1 with the Securities and Exchange Commission (SEC) and raises money from the public. A public company is also a reporting company. Thus, a public company is any company with 300 or more shareholders as defined in the US 1933 Securities Act that elects to become a reporting company. Under the US 1934 Act, any company with 500 or more public shareholders or a company with some public shareholders and assets of $5 million dollars must become a reporting company. Thus, whether a company is public or private is largely dependent upon the whether the company has "public shareholders. [a definition of "public shareholder" is needed here]

A public company can have five or more owners. It has a board of directors that is elected by shareholders. The capital is provided by the shareholders

[edit] United Kingdom

In the UK, a public company is a company that has registered as a public company at Companies House by the alteration of its name to include the suffix "plc" or "public limited company", and which has received a certificate stating that it has an issued share capital of no less than £50,000. If there are fewer than two shareholders, the sole shareholder is liable to a fine^{[citation needed]}.

A public company is subject to much more stringent filing and accounting requirements than a private company. It is therefore permitted to offer its shares to the general public (in particular by trading them on a public stock exchange), and can thereby raise large amounts of capital at low risk. However, a large number of companies register as public companies for the increased status and for the likelihood of an improved credit rating and the consequent ability to borrow money at a lower cost.

[edit] Public versus private companies

A public company has several advantages. It is able to raise funds and capital through the sale of its securities. This is the reason why public corporations are so important, historically; prior to their existence, it was very difficult to obtain large amounts of capital for private enterprises. In addition to the ease of raising capital, public companies may issue their securities as compensation for those that provide services to the company, such as their directors, officers and employees. While private companies may also issue their securities as compensation for services, the recipent of those securities often have difficulty selling those securities on the open market. Securities from a public company, typically have an established fair market value at any given time as determined by the price the security is sold for on the stock exchange where the security is traded.

The primary disadvantages of being a public company includes increased government regulations that the company must comply with such as reporting and disclosure requirements, which can be costly to comply with and may also provide competitors with information about the company's activities.

A private company has several advantages. It has no requirement to publicly disclose much, if any financial information; such information could be useful to competitors. For example, Form 10-K is an annual report required by the SEC each year that is a comprehensive summary of a company's performance. Private companies do not file form 10-Ks. It is less pressured to "make the numbers" - to meet quarterly projections for sales and profits, and thus in theory able to make decisions that are best in the long-run. It spends less for certified public accountants and other bureaucratic paperwork required of public companies by government regulations. For example, the Sarbanes-Oxley Act in the United States does not apply to private companies. The wealth and income of the owners remains relatively unknown by the public.

The norm is for new companies, which are typically small, to be privately owned. After a number of years, if a company has grown significantly and is profitable, or has promising prospects, there is often an initial public offering which converts the private company into a public company or an acquisition of a company by public company. Yet, some companies choose to remain private for a long period of time after maturity into a profitable company. Investment banking firm Goldman Sachs and shipping services provider United Parcel Service (UPS) are examples of profitable companies which remained private company for many years after maturing into profitable companies.

Less common, but not unknown, is for a public company to pay cash to its shareholders and become private. This is typically done through a leveraged buyout and occurs when the buyers believe the securities have been undervalued by investors. Public companies can also become private when purchased by a larger company that is private.

[edit] Trading and Valuation

The shares of a public company are often traded on a stock exchange. The value or "size" of a public company is called its market capitalization, a term which is often shortened to "market cap". This is calculated as the number of shares outstanding (as opposed to authorized but not necessarily issued) times the price per share. For example, a company with two million shares outstanding and a price per share of $40 would have a market capitalization of $80 million. However, a company's market capitalization should not be confused with the fair market value of the company as a whole since the price per share are influenced by other factors such as the volume of shares traded.

For example, if all shareholders were to simultaneously try to sell their shares in the open market, this would immediately create downward pressure on the price the share is traded for unless there were an equal number of buyers willing to purchase the security at the price the sellers demand. So, sellers would have to either reduce their price or choose not to sell. Thus, the number of trades in a given period of time, commonly referred to as the "volume" is important when determining how well a company's market capitalization reflects true fair market value of the company as a whole. The higher the volume, the more the fair market value of the company is likely to be reflected by its market capitalization.

Another example of the impact of volume on the accuracy of market capitalization is when a company has little or no trading activity and the market price is the simply the price at which the most recent trade took place [need better definition; "market price" is always the price at which the most recent trade took place]. This occurs when there are no buyers willing to purchase the securities at the price being offered by the sellers and there are no sellers willing to sell at the price the buyers are willing to pay. While this is rare when the company is traded on a major stock exchange, but it is not uncommon when shares are traded over the counter (OTC). Because there is little volume, it is difficult to determine a "price per share" since it largely depends upon whether the buyers or the sellers are willing to adjust their offers to make a trade.