What Is A Public Company (Explained: All You Need To Know)

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What Is A Public Company

A public company is a term typically used to refer to a corporation that is listed on a stock exchange where its shares can be bought and sold by the general public.

In other words, a public company is a corporation where the “public” can purchase shares to become a shareholder.

Although most of the time we think of public companies as those whose shares are listed on a stock exchange, it’s also possible that a public company’s shares be traded on over-the-counter markets.

An over-the-counter market refers to transactions between broker-dealers, investment bankers, and similar institutions.

The main reason why a company may want to go public is to have the ability to sell shares to the general public and raise capital to fund its growing business operations.

When a private company goes “public” for the first time, the first offering of shares to the public is called an Initial Public Offering (IPO).

At the initial public offering, the company offers a certain number of shares to be traded on a stock exchange allowing any person or organization to purchase shares.

Keep reading as I will further break down the meaning of a public company and tell you how it works.

Keep reading as I will further break down the meaning of a public company and tell you how it works.

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Why Become A Public Company

There are many reasons why a company will want to go public.

The main reason a company will go public is to raise capital by selling equity securities to the general public.

By selling shares in the corporation to the public, the company is relinquishing a certain percentage of ownership in exchange for equity capital that it will not have to reimburse the investors.

This way, the company will be able to better manage its capital structure to take advantage of debt or equity capital and optimize how it is funded.

Another reason the company will want to go public is that there’s a certain prestige that comes with being regarded as a public company.

There are many well-known organizations that are public, such as Google, Microsoft, Apple, ExxonMobil, Pfizer, and many others.

Being in the “public company club” can have a positive impact on the company’s business, how it is perceived by suppliers, vendors, employees, and other stakeholders.

From the shareholder’s perspective, going public can give the initial shareholders of the company a path to exit or cash out.

Early investors, founding members, key employees, and other stakeholders will have the ability to easily sell shares to earn a profit. 

The process of going public can be highly profitable and rewarding for early investors and shareholders.

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How To Become A Public Company 

To become a public company, a corporation must follow a certain process.

In many cases, a public company will start out as a private company owned by a small number of shareholders or investors.

As the company grows, it may find that it would be beneficial to sell shares to the general public to raise the capital it may need to scale its business.

In the United States, the Securities and Exchange Commission sets out the rules and requirements that must be observed by public companies.

When a company sells shares to the public, has achieved a certain shareholder base, or voluntarily registers with the SEC, it will be considered a public company.

Private companies will generally hire investment banking firms and lawyers to help them prepare the necessary documents and file the necessary disclosures with the SEC so they can become public.

The investment banking firms will work with the company to determine how many shares to offer to the public, evaluate the stock price, and help generate interest in the IPO.

The lawyers will make sure that the company files all the proper documentation with the authorities and provides the legally required disclosures to investors.

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Public Company Drawbacks

Although there are many benefits to becoming a public company, it’s important to also consider its drawbacks.

The first notable drawback for a private company looking to go public is the cost associated with the procedures and steps that must be accomplished to eventually get listed.

Private companies will need to prepare financial statements, prospectus, file disclosures, register with the SEC, and do many other things.

This can take time and can be quite costly.

The second disadvantage for a company to going public is that once you are public, you must make sure that you continually observe the SEC rules and requirements, file your financial statements at regular intervals, and do what’s necessary to remain in good standing.

Furthermore, when the general public is enabled to purchase shares in the corporation, this can also expose the company to influence by investors that acquire a large enough position in the corporation.

Public companies are also heavily scrutinized by regulators and the public.

As a result, the company must continually manage negative press and engage in proper public relations to ensure that changes in its business model, financial position, or other business operations do not adversely impact the company shares.

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Public Company FAQ

What does it mean to be a public company?

The term “public company” can have a couple of meanings.

The first meaning, which is what most people consider a public company, is to refer to a company that is listed on a stock exchange where the public can buy and sell its shares.

The second meaning is a company that is considered to be a public company because it has offered shares to the public, it has achieved a certain size in shareholder base, or it voluntarily registers with the SEC.

It’s important to note that a “public company” refers to a company in the private sector (as opposed to the public sector) that is either listed in different financial markets or is considered as a public company by law.

What are the advantages of being a public company?

There are many advantages of becoming a public company, such as the company will have access to the financial market, will get more visibility in the media, company investors can share business risk with the public, and initial shareholders and early investors can cash out.

What are the disadvantages of being a public company?

The main disadvantages of being a public company are that public entities will need to continually make financial and regulatory disclosures to the authorities and the public, they must be regularly audited by outside auditors, news and the media can cause swings in the stock price, and they may have to deal with external shareholders influencing the board and the leadership team.

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Takeaways 

So there you have it folks!

What does a public company mean?

In a nutshell, the term public company is generally considered to refer to a company listed on a major stock exchange or public market.

Another way to look at a public company is to refer to a company that is required by law to make important disclosures to the public and regulatory authorities.

In the United States, when a company sells securities to the public, attains an investor base of a certain size, or voluntarily registers with the SEC, it will be considered a public company as well.

Public companies enjoy access to capital markets where they can raise the funds they need to pursue their business operations.

On the flip side, public companies must remain transparent with the public about their financials and business operations and must continually make disclosures as required by law.

Now that you know what a public company is all about and how it works, good luck with your research!

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