What Is a Public Company?
A public company is a corporation whose shareholders have a claim to part of the company's assets and profits. It's also called a publicly traded company. This type of company is called a public limited company (PLC) in the United Kingdom.
Ownership of a public company is distributed among general public shareholders through the free trade of shares of stock on stock exchanges or over-the-counter (OTC) markets.
Key Takeaways
- A public company, also called a publicly traded company, is a corporation whose shareholders have a claim to part of the company's assets and profits.
- Ownership of a public company is distributed among general public shareholders through the free trade of shares of stock on stock exchanges or over-the-counter (OTC) markets.
- A public company is required to disclose its financial and business information regularly to the public.
- It must also report its securities trading on public exchanges.
A public company is required to disclose its financial and business information regularly to the public in addition to its securities trading on public exchanges. A company is considered a public company by the U.S. Securities and Exchange Commission (SEC) if it has public reporting requirements.
Understanding a Public Company
Most public companies were once private companies that were owned by their founders, management, or a group of private investors. Private companies don't have any public reporting requirements. A company is required to conform to public reporting requirements when it meets any of certain criteria:
- They sell securities in an initial public offering (IPO).
- Their investor base reaches a certain size.
- They voluntarily register with the SEC.
An IPO is the process by which a private company begins to offer shares to the public in a new stock issuance.A company is considered to be private before completing an IPO. Issuing shares to the public through an IPO is very important for a company because it provides it with a source of capital to fund growth.
Examples of public companies include Chevron Corporation, McDonald's, and The Procter & Gamble Company.
A company must meet certain requirements to complete an IPO, both regulations set forth by the regulators of the stock exchange where it hopes to list its shares and those set forth by the SEC. A company usually hires an investment bank to market its IPO, determine the price of its shares, and set the date of its stock issuance.
A company typically offers its current private investors share premiums when it undergoes an IPO as a way of rewarding them for their prior, private investment in the company.
The U.S. Securities and Exchange Commission (SEC) states that any company in the U.S. with 2,000 or more shareholders or 500 or more shareholders that are not accredited investors must register with the SEC as a public company and adhere to its reporting standards and regulations.
Advantages of Public Companies
Public companies have certain advantages over private companies. They have access to the financial markets and can raise money for expansion and other projects by selling stock or bonds. A stock is a security that represents a fraction of ownership in acorporation.
Selling stocks allows the founders or upper management of a company to liquidate some of their equity in the company. A corporate bond is a type of loan issued by a company to raise capital. An investor who purchases a corporate bond is effectively lending money to the corporation in return for a series of interest payments. These bonds may also actively trade on the secondary market in some cases.
There's some clout attached to being a publicly traded company and having your stocks trade on a major market like the New York Stock Exchange because a company must have achieved a certain level of operational and financial size and success to transition to being publicly traded.
Disadvantages of Public Companies
The ability to access the public capital markets also comes with increased regulatory scrutiny, administrative and financial reporting obligations, andcorporate governancebylaws with which public companies must comply.This results in less control for the majority owners and founders of the corporation. There are also substantial costs to conducting an IPO, as well as the ongoing legal, accounting, and marketing costs of maintaining a public company.
Public companies must meet mandatory reporting standards regulated by government entities and they must file reports with the SEC on an ongoing basis. The SEC sets stringent reporting requirements. These include the public disclosure of financial statements and an annual financial report called a Form 10-K that gives a comprehensive summary of acompany's financial performance.
Companies must also file quarterly financial reports called Forms 10-Q and current reports on Form 8-K to report when certain events occur. These events include the election of new directors or the completion of an acquisition.
These reporting requirements were established by the Sarbanes-Oxley Act, a set of reforms intended to prevent fraudulent reporting. Qualified shareholders are also entitled to specific documents and notifications about the corporation's business activities.
A company must answer to its shareholders when it's public. Shareholders elect a board of directors who oversee the company's operations on their behalf. Certain activities such as mergers and acquisitions and some corporate structure changes and amendments must be brought up for shareholder approval. This effectively means that shareholders can control many of the company's decisions.
Special Considerations
There may be some situations where a public company no longer wants to operate within the business model required of a public company. There are many reasons why a public company may decide to go private.
It may decide that it doesn't want to have to comply with the costly and time-consuming regulatory requirements of being a public company, or it might want to free up its resources to devote to research and development (R&D), capital expenditures, and funding pension plans for its employees.
A "take private" transaction is necessary when a company transitions to private. A private equity firm or a consortium of private equity firms either purchases or acquires all the outstanding stock of the publicly-listed company. This sometimes requires the private equity firm to secure additional financing from an investment bank or another type oflenderthat can provide enough loans to help finance the deal.
The company will be delisted from its associated stock exchanges and will return to private operations when the purchase of all the outstanding shares is complete.
Is an Exchange-Traded Fund (ETF) a Publicly Traded Company?
An ETF is similar to a publicly traded company in that its shares are traded on stock exchanges and the market determines their value. You can buy ETF shares just as you would buy shares of a publicly traded company through a brokerage account or a broker.
What Is a Reporting Company?
Reporting company is essentially another name for a public company. These companies must meet the same reporting requirements with the SEC as public companies. A reporting company does not necessarily have to undergo an IPO, however. It can register its class of securities with the SEC instead.
What Is a Beneficial Owner?
A beneficial owner is someone who controls or owns 25% or more of a reporting or public company and who has significant control over the company. Companies must report their beneficial owners and provide certain information about them.
The Bottom Line
You probably own stock in a public company if you've invested in a mutual fund or a pension plan because many plans and funds make use of this type of investment. You can invest directly in such a company as well if you choose to do so. In either case, you and the other shareholders have an ownership stake in the company proportional to the amount of stock you've purchased.
