This article discusses what a private company is, types of private companies, and the advantages and disadvantages of operating under this corporate structure.
The business landscape accommodates various types of enterprises, from small startups to large corporations. Operating as a private company offers a unique set of benefits and challenges. Understanding the characteristics and types of private firms can help business owners make logical decisions about the most suitable corporate structure for their enterprise.
What is a Private Company?
A private company (“Pty Ltd” or “Proprietary Limited”) is a type of business entity that is owned by a relatively small number of individuals or entities and is not publicly traded on a stock exchange. In other words, the ownership of a private company is typically limited to a select group of people, such as founders, investors, or closely held family members.
Private companies are common in various industries and come in all sizes — from small family-owned businesses to large multinational corporations.. While they do not have the same level of public scrutiny and regulatory requirements as public companies, they are subject to various legal and financial regulations depending on their jurisdiction and industry.
Characteristics of a Private Company
It’s important to note that the specific regulations and characteristics of private companies may vary depending on the country and its corporate laws. Therefore, it’s advisable to consult with legal and financial professionals or refer to the specific corporate laws and regulations in your jurisdiction when establishing or operating a private company.
Here are some common features associated with private companies:
- Limited Liability. Investors in a privately held company benefit from limited liability, ensuring that their personal assets are typically safeguarded from the company’s financial obligations and debts.
- Fewer Reporting Requirements. Private companies have fewer reporting and disclosure obligations compared to public companies, resulting in less regulatory scrutiny.
- Restricted Share Transfer. Shares in private companies are usually not freely transferable, and the sale of shares often requires approval from existing shareholders.
- Fewer Shareholders. Private companies have restrictions on the number of shareholders they can have, usually capped at 50.
- Not Listed on Stock Exchange. Private companies are not listed on any stock exchange, unless they decide to go public on account of sufficient capital.
Types of Private Companies in Australia
Now that we have a basic understanding of private companies, let’s explore the types of private companies that operate in Australia.
Small Proprietary Company
A small proprietary company is defined as one with at least two of the following: annual revenue of less than $25 million, assets worth less than $12.5 million, and fewer than 50 employees. These companies enjoy certain financial reporting concessions when dealing with ASIC, such as no obligation to file annual financial or director’s reports.
Large Proprietary Company
A large proprietary company exceeds at least two of the thresholds mentioned above, including having over 100 employees. Large proprietary companies have more extensive reporting obligations compared to small proprietary companies.
Family-Owned Business
Many private companies are family-owned and operated. These businesses often have a strong focus on preserving family values and legacies.
In addition to government registries, family-owned businesses in Australia are part of the Family Business Association, which offers networking and development opportunities for family businesses.
Investor-Owned Company
Some private companies are owned by a group of investors or venture capitalists. They may seek private equity investment for growth and expansion.
Startups and Emerging Businesses
Many startups and emerging businesses begin as private companies to maintain control and confidentiality while they develop their products or services.
The Advantages of Operating as a Private Company
Operating as a private company in Australia offers several advantages.
- Control. Private company owners retain full control over their business without the influence of external shareholders.
- Privacy. Private companies are not required to disclose as much financial and operational information as public companies, providing better corporate security.
- Limited Liability. Shareholders have the advantage of limited liability, which shields their personal assets from the financial obligations of the business.
- Flexibility. Private companies have more flexibility when it comes to decision-making and operational matters.
- Fewer Regulatory Requirements. Private companies have fewer regulatory and compliance obligations, reducing administrative burdens.
The Disadvantages of Operating as a Private Company
However, there are also some disadvantages associated with private companies.
- Capital Access. Raising capital can be more challenging for private companies as they cannot publicly sell shares. However, under ASIC regulations implemented in 2018, equity crowdfunding may help add to the capital, subject to regulations.
- Limited Exit Options. Exiting or selling a private company can be complex and may require approval from existing shareholders.
- Limited Investor Pool. Private companies have a restricted pool of potential investors compared to public companies.
- Limited Transparency. Reduced disclosure requirements can limit transparency, potentially impacting relationships with stakeholders.
- Financial Reporting. Large proprietary companies still have substantial reporting obligations, which can be burdensome.
Examples of Private Companies
Woolworths Group Pty Ltd
Woolworths is one of Australia’s largest supermarket chains, operating under various banners, including Woolworths, Countdown (in New Zealand), and Big W.
BHP Group Limited
Formerly BHP Billiton, BHP is a multinational firm with significant interests in the global mines and energy sectors.
QANTAS Airways Limited
Australia’s flag carrier, QANTAS is one of the world’s oldest airlines with over 100 years in flight. Aside from international air travel services, the airline’s domestic arm is also a Pty Ltd.
Westpac Banking Corp Limited
Westpac is one of Australia’s “big four” banks and offers a wide range of financial services, including banking, insurance, and wealth management.
Telstra Group Limited
The Big T is Australia’s premiere telco, with a raft of companies having Pty Ltd in their name including Telstra Super and Telstra Ventures.
Whether you value control, privacy, or limited liability, a private company structure may align with your business goals. However, it’s essential to weigh the advantages against the potential limitations to determine the best fit for your business.
DISCLAIMER: This article is for informational purposes only and is not meant as official business advice. AVANTE PARTNERS has no business relationships with any company or industry body.