A publicly held company exists when that company's stock is owned by members of the general public. The stock of a publicly held company is openly traded. In order for a company to be publicly held, it must be organized as a corporation. A corporation is a legal form of business that is established by a corporate charter granted by a particular state. The corporate charter establishes the corporation as a separate legal entity from its owners. The corporation is said to be a "legal person" and may enter into agreements, make contracts, and sue or be sued.
A corporation may be publicly or privately owned. In the case of a privately owned, or closely held, corporation, all of the stock is concentrated in the hands of a few individuals. When the privately held corporation first issues its stock, it is not offered for sale to the general public. On the other hand, the stock of a publicly held corporation is offered to the general public for sale. A privately held company may decide to "go public." That is, it makes a stock offering to the general public in order to raise capital. The first public stock offering of a company is known as its initial public offering (IPO).
The owners of a corporation, whether public or private, are its common stockholders. There are two types of stock, common and preferred. Preferred stockholders generally receive a stated dividend of a specific amount. Common stockholders receive a dividend based on corporate profits, although in some cases common stock pays no dividend. The corporation's charter specifies how many shares and what types of stock it is allowed to issue. While both preferred stockholders and common stockholders are investors in the corporation and provide it with capital, it is the common stockholders who actually own the firm.
In a privately held corporation, the owners and managers may be the same individuals. That is not the case with a publicly held company. A distinction is made between a publicly held corporation's owners and its managers. While the shareholders own the firm, the company's managers, executives, and directors run the firm. The board of directors is responsible for running the corporation to maximize profits for the shareholders. In practice the corporate directors establish corporate policy, make major decisions, and hire managers and others to oversee the daily operations of the corporation. Shareholders can express their satisfaction or displeasure with the board of directors of a publicly owned firm by voting them in or out of office.
While the shareholders of a publicly owned company are its owners, they are not liable for the actions of the company. Through the concept of limited liability, the shareholders may lose their investments in a company, but they have no personal liability beyond that. For example, they are not personally responsible for the debts of the corporation. Although they are owners of the corporation, the shareholders have in effect agreed to give up immediate control of the corporation. As a result, they are not held personally liable for the actions of the corporation.
Publicly held companies must follow the financial reporting and disclosure requirements of the Securities and Exchange Commission (SEC). The SEC regulations are designed to keep stockholders informed of the financial condition of the corporation. In addition, the SEC regulates all stock offerings and requires that new stock offerings be registered and fully described in a document called a prospectus. Privately held corporations, on the other hand, are not required to make public their profits and other financial results.
Publicly held companies are responsible for much of the business activity of the United States. Corporations that have the ability to raise capital by selling shares of stock to the general public can accumulate large amounts of capital for use in their business. Successful and relatively young privately held companies often attempt to become publicly held companies when their management believes there is enough public confidence in their ability to turn a profit. It must be remembered, however, that not all corporations are publicly held, and there are some very large corporations that remain privately held.
[ David P Bianco ]
Arkebauer, James. Going Public: Everything You Needed to Know to Take Your Company Public or Invest in an IPO or DPO. Chicago: Dearborn Trade, 1998.
Field, Drew. Direct Public Offerings: The New Method for Taking Your Company Public. Naperville, IL: Sourcebooks, 1997.
Lipman, Frederick D. Going Public: Everything You Need to Know to Successfully Turn a Private Enterprise into a Publicly Traded Company. Upland: DIANE Publishing, 1998.