Private Company

What is a 'Private Company' A private company is a firm held under private ownership. Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges and are not issued through an initial public offering (IPO). As a result, private firms do not need to meet the Securities and Exchange Commission's (SEC) strict filing requirements for public companies. In general, the shares of these businesses are less liquid, and their valuations are more difficult to determine.

BREAKING DOWN 'Private Company'

Private companies are sometimes referred to as privately held companies. There are four main types of private companies: sole proprietorships, limited liability corporations, S corporations and C corporations — all of which have different rules for shareholders, members and taxation. All companies in the United States start as privately held companies. Private companies range in size and scope, encompassing the millions of individually owned businesses in the U.S. and the dozens of unicorn startups worldwide. Even U.S. firms such as Cargill, Koch Industries, Deloitte and PricewaterhouseCoopers with upwards of $25 billion in annual revenue fall under the private company umbrella. Remaining a private company, however, can make raising money more difficult, which is why many large private firms eventually choose to go public through an IPO. While private companies do have access to bank loans and certain types of equity funding, public companies can often sell shares or raise money through bond offerings with more ease.

The Main Types of Private Companies

Sole proprietorships put company ownership in the hands of one person. A sole proprietorship is not its own legal entity; its assets, liabilities and all financial obligations fall completely onto the individual owner. While this gives the individual total control over decisions, it also raises risk and makes it harder to raise money. Partnerships are another type of ownership structure for private companies; they share the unlimited liability aspect of sole proprietorships but include at least two owners. Limited liability companies (LLCs) often have multiple owners who share ownership and liability. This ownership structure merges some of the benefits of partnerships and corporations, including pass-through income taxation and limited liability without having to incorporate. S Corporations and C corporations are similar to public companies with shareholders. However, these types of companies can remain private and do not need to submit quarterly or annual financial reports. S corporations can have no more than 100 shareholders and are not taxed on their profits while C corporations can have an unlimited number of shareholders but are subject to double taxation.

Why Companies Stay Private

The high costs of undertaking an IPO is one reason why many smaller companies stay private. Public companies also require more disclosure and must publicly release financial statements and other filings on a regular schedule. These filings include annual reports (10-K), quarterly reports (10-Q), major events (8-K) and proxy statements. Another reason why companies stay private is to maintain family ownership. Many of the largest private companies today have been owned by the same families for multiple generations, such as the aforementioned Koch Industries, which has remained in the Koch family since its founding in 1940. Staying private means a company does not have to answer to its public shareholders or choose different members for the board of directors. Some family-owned companies have gone public, and many maintain family ownership and control through a dual-class share structure, meaning family-owned shares can have more voting rights.




SIMPLICITY IN TAX PAYMENT

  • Currently, a startup spends a lot of time and energy to manage the various taxes at various points. It has to deal with VAT, Excise Duty, Service Tax, Octroi, Entry Tax etc. After GST, only one unified tax rate will be applicable. This brings in a major advantage to startup businesses by simplifying the process of tax payment.


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EXEMPTIONS TO NEW BUSINESS

  • Earlier, any business that dealt with goods liable to pay VAT was required to get registration under the VAT act if the turnover crossed Rs. 5 Lakhs. As per the new GST, the limit shall be Rs. 10 lakhs which is a very good thing for startups. Also, businesses with turnover between Rs 10 and 50 lakh are expected to be taxed at a lower rate.

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IMPLEMENTATION OF BUSINESS

  • Any new business needs to have a VAT registration from sales tax department. A business may have to follow unnecessary cumbersome process of registration which may be different in different States. GST will bring about uniformity in process of registration and will only require a centralized registration that will make starting business much simpler.
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SIMPLICITY IN TAX CALCULATION

  • There are many businesses that require the payment of not only Service Tax but also VAT. This makes the calculation for tax very complex. By implementation of GST, only one tax will be required to be calculated and paid. This will make the tax calculation easier.




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