out reporting
Reporting requirements for a private company vary based on its agreements with stakeholders. Outside investors in a private company usually establish reporting requirements as part of the agreement to invest funds in the business. A private company circulates its reports among its closed group of stakeholders — executives, managers, creditors, and investors — and doesn't have to share them with the public.
A private company must file financial reports with the SEC when it has more than 500 common shareholders and $10 million in assets, as set by the Securities and Exchange Act of 1934. Congress passed this act so that private companies that reach the size of public companies and acquire a certain mass of outside ownership have the same reporting obligations as public companies. (See the nearby sidebar “Private or Publix?” for an example of this type of company.)
Publix Super Markets is a private company owned by more than 101,000 shareholders. You can think of it as a semipublic company. However, until Publix actually decides to sell stock on a public exchange — if it ever does — it's classified as a private company. Publix makes its stock available during designated public offerings that are open only to its employees and nonemployee members of its board of directors. It also offers employees a stock ownership plan, which has more than 140,000 participants. So even though Publix stock isn't sold on a stock exchange, Publix must file public financial reports with the SEC.
In some cases, private companies buy back stock from their current shareholders to keep the number of individuals who own stock under the 500 limit. But generally, when a company deals with the financial expenses of publicly reporting its earnings and can no longer keep its veil of secrecy, the pressure builds to go public and gain greater access to the funds needed to grow even larger.
Understanding Public Companies
A company that offers shares of stock on the open market is a public company. Public company owners don't make decisions based solely on their preferences — they must always consider the opinions of the business's outside investors.
Before a company goes public, it must meet certain criteria. Generally, investment bankers (who are actually responsible for selling the stock) require that a private company generate at least $10 million to $20 million in annual sales, with profits of about $1 million. (Exceptions to this rule exist, however, and some smaller companies do go public.)
Before going public, company owners must ask themselves the following questions:
Can my firm maintain a high growth rate to attract investors?
Does enough public awareness of my company and its products or services exist to make a successful public offering?
Is my business operating in a hot industry that will help attract investors?
Can my company perform as well as, and preferably better than, its competition?
Can my firm afford the ongoing cost of financial auditing requirements (which can be as high as $2 million a year for a small company)?
If company owners are confident in their answers to these questions, they may want to take their business public. But they need to keep in mind the advantages and disadvantages of going public, which is a long, expensive process that takes months and sometimes even years.
Public company founders who don't keep their investors happy can find themselves out on the street and no longer involved in the company they started. Steve Jobs and Steve Wozniak, who started Apple Computer, found out the hard way that selling stock on the public market can ultimately take the company away from the founders.
Jobs and Wozniak became multimillionaires after Apple Computer went public, but shareholders ousted them from their leadership roles in a management shake-up in 1984. Wozniak decided to leave Apple soon after the shake-up. Apple's new CEO announced that he couldn't find a role for Jobs in the company's operations in 1985.
Interestingly, Jobs ended up as the head of Apple again in 1998, when the shareholders turned to him to rescue the company from failure. He engineered a comeback for Apple before his death in 2011.
Examining the perks
If a company goes public, its primary benefit is that it gains access to additional capital (more cash), which can be critical if it's a high-growth business that needs money to take advantage of its growth potential. A secondary benefit is that company owners can become millionaires, or even billionaires, overnight if the initial public offering (IPO) is successful.
Being a public company has a number of other benefits:
New corporate cash: At some point, a growing company usually maxes out its ability to borrow funds, and it must find people willing to invest in the business. Selling stock to the general public can be a great way for a company to raise cash without being obligated to pay interest on the money.
Owner diversification: People who start a new business typically put a good chunk of their assets into starting the business and then reinvest most of the profits in the business in order to grow the company. Frequently, founders have a large share of their assets tied up in the company. Selling shares publicly allows owners to take out some of their investment and diversify their holdings in other investments, which reduces the risks to their personal portfolios.
Increased liquidity: Liquidity is a company's ability to quickly turn an asset into cash (if it isn't already cash). People who own shares in a closely held private company may have a lot of assets but little chance to actually turn those assets into cash. Selling privately owned shares of stock is very difficult. Going public gives the stock a set market value and creates more potential buyers for the stock.
Company value: Company owners benefit by knowing their firm's worth for a number of reasons. If one of the key owners dies, state and federal inheritance tax appraisers must set the company's value for estate tax purposes. Many times, these values are set too high for private companies, which can cause all kinds of problems for other
