A public company is an organization that initially offers stock in the public market, and conducts trading in the open market. These companies are run by shareholders that own a percentage of the company based on the number of shares they possess. The many advantages and disadvantages of becoming a public company must be considered carefully before owners make a decision as to going public.
In a private company, the business is usually owned by the company founder. Partial ownership may be granted to business partners, major investors, or even employees at the discretion of the founder. In a public company, shareholders own the business, regardless of history or relationship with the company prior to buying shares. Shareholders can make decisions about what to do with the company through votes, with each shareholder given a percentage of ownership proportional to the amount of shares owned.
Many companies decide to go public as a way to raise additional money for operation or expansion. By selling off some of the company to shareholders, the capital gained can allow a cash-strapped business to continue operations, or make a small, single location business into a chain. The downside of becoming a public company is that the original owner loses power and the ability to act alone; in some cases, if another shareholder buys most of the company, the original owner may be forced out of power entirely.
One major disadvantage to becoming a public company is increased financial disclosure. Private companies often benefit from being able to keep financial information confidential, as this prevents competitive businesses from gaining crucial information about how the business runs. Public ones are subject to extensive government regulation, and typically must disclose most financial records. While this helps keep fraud down, it can be detrimental in a competitive market.
As a business with shares traded on an open stock market, a public company is also subject to the widely varying behavior of the market. Even a successful company can end up in trouble due to a market crash that sends investors scurrying away. In a strong market, being a public company can be greatly beneficial, as healthy profits and consumer confidence can drive up the cost of shares that help raise capital for the company.
It is also possible for a public company to reverse the process and become private. If the owner or directors of a company purchase back all available shares, they again become the main power behind the business. This process, known as privatization, can also occur if all shares of the company are bought by another private company.