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Everything you need to know about a private company in Australia

27/06/2022 by
The Marketing Team
  A private company is a business owned by specific shareholders or private investors. Unlike public companies, private companies do not trade shares on a public exchange. This structure allows them to maintain control and focus on long-term goals. Private companies play a vital role in the economy, driving growth, fostering innovation, and offering flexibility […]
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A private company is a business owned by specific shareholders or private investors. Unlike public companies, private companies do not trade shares on a public exchange. This structure allows them to maintain control and focus on long-term goals. Private companies play a vital role in the economy, driving growth, fostering innovation, and offering flexibility in how they operate and manage resources.

 

 

What is a private company?

A private company is a business entity owned by a select group of shareholders or private investors. Unlike public companies, private companies do not offer shares to the public on the stock exchange. Instead, they rely on private funding sources such as personal investments, private equity, or venture capital. This structure allows private companies to maintain greater control over their operations while limiting access to broader capital markets.

Key characteristics of private companies include a limited number of shareholders, restrictions on share transfers, and fewer disclosure requirements. For example, in Australia, a proprietary limited company (Pty Ltd) can have no more than 50 non-employee shareholders. These companies are not required to publish annual reports or disclose financial statements to the public, giving them greater privacy in their business activities.

Private companies differ from public companies in several ways. Public companies can raise funds through the sale of shares on a public exchange, while private companies must rely on internal resources or private investors. Additionally, public companies are subject to stricter regulations and must provide regular disclosures to members of the public, including quarterly and annual reports. Private companies, by contrast, operate under fewer regulatory obligations, which reduces administrative burdens but limits their ability to raise funds publicly.

In Australia, private companies play a significant role in the economy. They make up a large portion of small and medium-sized enterprises (SMEs) and contribute to job creation, innovation, and economic growth. By maintaining private ownership, these companies often focus on long-term goals and personalised business strategies, adding flexibility to their operations.

A quick guide to what a 'private company' is

A private company is a business owned by a select group of shareholders or investors. It does not trade shares on public markets, allowing greater control and privacy. Private companies have fewer compliance requirements and focus on long-term goals. They are essential to the economy, driving innovation and growth across various industries while remaining flexible and independent.

Two professionals in a modern office discussing a business chart on a tablet, symbolising private companies' focus on personalised strategies and decision-making.

Key features of private companies

Private companies operate under specific rules that distinguish them from public companies. These rules affect their ownership, funding, and compliance requirements, shaping how they conduct business.

Limited number of shareholders
Private companies in Australia can have up to 50 non-employee shareholders. This restriction keeps ownership concentrated, allowing for more direct decision-making. Shareholders in private companies often include founders, family members, or private investors. This setup makes it easier to maintain control over the company's direction and protect sensitive business information.

Restricted access to public capital
Private companies cannot raise funds by offering shares on a public exchange. Instead, they rely on private funding sources, such as personal investments, venture capital, or private equity. While this protects the company from the pressure of public trading, it can limit opportunities to raise large amounts of capital quickly. Private companies often need to build strong relationships with private investors to fund their growth and operations.

Lower compliance and disclosure requirements
Unlike public companies, private companies do not need to meet extensive reporting obligations. For example, they are not required to publish annual reports or financial statements for members of the public. This reduces administrative burdens and allows private companies to focus on their operations. However, they must still comply with the Corporations Act 2001 and meet reporting requirements set by the Australian Securities and Investments Commission (ASIC).

Flexibility vs funding limitations
These features provide private companies with flexibility to make decisions without shareholder approval or market scrutiny. However, restricted access to public funding can make it challenging to scale operations or compete with publicly traded companies. Balancing control with funding needs is a key consideration for private companies aiming to grow while maintaining their private status.

Types of private companies

Private companies in Australia are classified into distinct types based on their structure and purpose. These classifications influence how the companies operate, manage liability, and raise funds.

Proprietary limited companies (Pty Ltd)
Proprietary limited companies, commonly known as Pty Ltd, are the most common type of private company in Australia. They limit liability for shareholders to the value of their shares, protecting personal assets from business debts. Pty Ltd companies cannot raise capital by offering shares to the public. They are ideal for small to medium-sized businesses due to their flexible structure and reduced compliance requirements compared to public companies.

Unlimited private companies
Unlimited private companies provide no limitation on the personal liability of shareholders. This means shareholders may be required to cover business debts beyond their investment in the company. These companies are less common and are often used in specialised situations where the shareholders are willing to accept the higher financial risk in exchange for other benefits, such as increased operational flexibility.

Companies limited by guarantee
Companies limited by guarantee are typically non-profit organisations or charities. Instead of shares, members contribute a nominal amount in the event the company is wound up. These companies focus on community or public benefits rather than profit-making. They must comply with specific regulations, often overseen by ASIC and the Australian Charities and Not-for-profits Commission (ACNC).

Type Liability Purpose
Proprietary limited companies Limited to share value Profit-making for small to medium businesses
Unlimited private companies Unlimited liability for shareholders Niche or specialised ventures
Companies limited by guarantee Nominal amount upon winding up Non-profits and charities

Understanding these types helps businesses choose the right structure to align with their goals and manage liability effectively. Each type comes with distinct advantages and obligations tailored to different business needs.

A diverse group of professionals collaborating around a table in a modern office, representing the teamwork and decision-making flexibility in private companies.

Examples of private companies

Private companies play a significant role in the global economy, contributing to various industries with innovation and strong market presence. In Australia, well-known examples include Cotton On, a global fashion retailer, and Linfox, a logistics company. Internationally, Mars, Inc., a leading confectionery and pet care company, and Koch Industries, a major player in energy and manufacturing, demonstrate the influence private companies can have.

How private companies contribute to industries

Private companies are often at the forefront of innovation. For instance, before going public, Atlassian revolutionised the tech industry with its project management and collaboration tools, such as Jira and Trello. Private companies like Cotton On have also expanded globally while adapting to trends in fast fashion, showcasing their agility and market understanding.

These companies can focus on long-term strategies without the pressure of meeting quarterly financial targets. This allows them to invest in research, sustainable practices, and employee development. They can operate flexibly and quickly respond to market demands, which is essential in fast-moving industries like technology and retail.

Why successful private companies stay private

Some companies choose to remain private despite significant growth opportunities. This decision is often driven by the desire to maintain control over business decisions and protect sensitive financial information. Private ownership also helps businesses avoid the regulatory requirements and scrutiny that come with being publicly traded.

By staying private, companies like Mars, Inc., retain the ability to prioritise their core values and long-term goals over short-term gains. This flexibility allows them to innovate and grow without external interference, highlighting the enduring appeal of private company ownership.

 

A professional reviewing financial and legal documents at a desk, representing the due diligence process involved in assessing private companies.

 

Differences between private and public companies

Private and public companies differ significantly in their structure, funding methods, and compliance requirements. These differences influence how they operate, raise capital, and meet regulatory obligations.

Ownership structure
Private companies have a limited number of shareholders, usually up to 50 non-employee shareholders in Australia. Shares are not available to the public, and ownership remains within a close group of investors. Public companies, on the other hand, can offer shares to the public through a stock exchange, making ownership more widespread.

Fundraising methods
Private companies rely on private funding from shareholders or private investors. They cannot raise funds through public equity markets. This limits their access to capital but allows greater control over decision-making. Public companies can raise significant capital by offering shares to the public through an Initial Public Offering (IPO) or on public stock exchanges. This access to capital markets comes with increased scrutiny.

Compliance and reporting
Private companies have fewer compliance and reporting obligations compared to public companies. They are not required to disclose detailed financial statements or quarterly performance to the public. Public companies must comply with stricter regulations, including filing annual reports and adhering to continuous disclosure rules. These requirements ensure transparency for investors and regulators.

Aspect Private Companies Public Companies
Ownership Limited number of shareholders Owned by the public, shares traded publicly
Fundraising Private funding Raise capital via public stock exchanges
Compliance Lower reporting requirements Stricter disclosure and reporting obligations

Understanding these differences helps businesses decide the right structure for their goals. Private companies offer control and privacy, while public companies provide greater opportunities to raise capital.

Why companies remain privately owned

Many companies choose to remain privately owned to maintain greater control and flexibility over their operations. Unlike public companies, private firms are not subject to the same regulatory demands or stock market pressures, allowing them to focus on long-term goals without external interference.

Control over business decisions
Private ownership ensures that decision-making remains with a limited group of shareholders or the original founders. This structure allows companies to align strategies with their vision without needing shareholder approval or facing public scrutiny. Owners can set priorities based on the company's mission rather than short-term market demands.

Reduced regulatory burden
Private companies are not required to comply with the same strict reporting requirements as public companies. They do not need to publish quarterly financial statements or disclose sensitive company information to the public. This reduced regulatory burden saves time, resources, and administrative costs, making it easier for private firms to operate efficiently.

Freedom from stock market pressures
Publicly traded companies face constant scrutiny from analysts, investors, and the media. They are often pressured to deliver consistent profits and meet quarterly earnings targets. Private companies avoid these pressures, enabling them to focus on sustainable growth and innovation. This freedom allows them to reinvest profits into the business without the need to please external investors.

Remaining private offers companies the ability to stay agile, focus on their core values, and adapt quickly to market changes. While raising capital may be more challenging, the advantages of privacy and control often outweigh the limitations for many businesses. These factors make private ownership a preferred choice for companies prioritising stability and long-term success.

Benefits and challenges of private companies

Private companies offer unique advantages, but they also face certain challenges. Understanding these helps business owners navigate opportunities and risks effectively.

Benefits of private companies
One major benefit is the flexibility in decision-making. Private companies are not bound by shareholder votes or public scrutiny. This freedom allows owners to make quick and strategic decisions that align with their long-term goals. They can prioritise innovation, sustainability, or customer service without the pressure to meet quarterly earnings targets.

Financial privacy is another key advantage. Private companies are not required to publish financial statements or disclose sensitive business information. This protects trade secrets and reduces administrative burdens associated with regulatory compliance.

Private companies can also focus on long-term objectives without external market pressures. Unlike public companies, which often prioritise short-term gains to satisfy investors, private firms can invest in research, development, or employee training to build sustainable growth.

Challenges of private companies
Despite the benefits, private companies face limitations. Raising large-scale funding can be challenging as they cannot access public capital markets. They rely on private investors, loans, or retained earnings to finance growth. This dependence can restrict expansion and limit resources.

Succession planning is another common issue. Without a clear plan, transitions in leadership or ownership can disrupt operations and hinder continuity. Scaling operations is also difficult, as limited funding and a smaller resource base may slow growth.

Private companies must balance their flexibility and privacy with the need for resources and strategic planning to overcome these challenges. By addressing these issues proactively, they can maximise their advantages while preparing for future opportunities.

How private companies go public

Private companies often go public to raise large amounts of capital and expand their operations. This process, called an Initial Public Offering (IPO), involves offering shares of the company to the public on a stock exchange. While going public provides access to capital markets, it requires extensive preparation and compliance with strict regulations.

The process of going public
The IPO process begins with due diligence. This involves a thorough review of the company's financial, legal, and operational standing. Financial auditing is a key step to ensure the company’s financial statements are accurate and compliant with regulatory standards. Legal compliance requires verifying that the company meets the rules set by the Australian Securities and Investments Commission (ASIC) and other governing bodies.

Key steps in the IPO process include:

  • Engaging advisors: Companies hire investment banks, accountants, and legal experts to guide the IPO process.
  • Filing with regulatory bodies: In Australia, companies must submit a prospectus to ASIC, detailing their business model, financial performance, and risks.
  • Setting the share price: The company and its advisors determine the value of shares based on factors like market conditions and financial valuation.
  • Public listing: Once approved, the company offers shares to the public through the stock exchange.

Why companies go public
Going public allows companies to raise substantial funds to support growth, pay off debts, or invest in new ventures. It also enhances credibility and visibility, making it easier to attract investors and partners. However, it comes with increased scrutiny, reporting requirements, and pressure to meet shareholder expectations.

Private companies must weigh the benefits of public listing against the challenges of compliance and reduced control. For some, the potential to fund their growth and access capital markets outweighs these challenges, making an IPO a valuable strategic move.

Conducting due diligence on private companies

Due diligence is a critical process for investors or buyers evaluating private companies. It involves a detailed examination of the company’s financial, legal, and operational aspects to assess its value, risks, and potential. Unlike public companies, private companies are not required to disclose as much information, making due diligence essential to verify the accuracy of the company’s claims.

Steps involved in due diligence
The due diligence process helps ensure the buyer or investor has a complete understanding of the company’s operations and risks. Key steps include:

  • Financial performance evaluation:
    Review the company’s financial statements, including income statements, balance sheets, and cash flow reports. This helps determine profitability, growth potential, and financial stability. Investors also assess debts incurred by the business and whether they impact future earnings.

  • Legal and compliance verification:
    Check compliance with relevant laws and regulations, including the Corporations Act 2001 in Australia. Review contracts, intellectual property rights, and any ongoing legal disputes. This step ensures the company operates within the law and that its assets and agreements are secure.

  • Market and operational analysis:
    Assess the company’s position in its industry, including competitors, market share, and growth opportunities. Review internal processes, key employees, and supplier relationships to understand operational efficiency and scalability.

Challenges in private company due diligence
Private companies are not required to provide the same level of disclosure as publicly traded companies. This limited transparency can make it harder to evaluate risks and opportunities. Investors often rely on detailed negotiations to access sensitive company information.

By thoroughly conducting due diligence, potential buyers and investors can make informed decisions, reduce risks, and ensure the company aligns with their financial and strategic goals.

Frequently asked questions about private companies

What is a private company?

A private company is a company owned by shareholders and not listed on a stock exchange. It operates as a separate legal entity and has fewer disclosure requirements than public companies. Private companies may limit the number of shareholders and restrict the transfer of shares to maintain control.

How does a private company differ from a partnership?

A private company is a separate legal entity, while a partnership is a business owned and operated by two or more people. Partnerships do not offer limited liability, meaning owners are personally responsible for business debts. Private companies generally protect shareholders’ personal assets by separating them from business obligations.

Can a private company become a public company?

Yes, a private company may go public through an IPO (Initial Public Offering). This process allows the company to offer shares to the public on a stock exchange. While this provides access to significant funds, it also comes with stricter regulatory requirements and increased public scrutiny.

How are proprietary companies regulated in Australia?

Proprietary companies are regulated under the Corporations Act 2001 and overseen by ASIC (Australian Securities and Investments Commission). These regulations ensure compliance with laws governing limited liability, shareholding, and reporting obligations, while reducing the regulatory burden compared to public companies.

What liability structure do private companies have?

Most private companies are structured as limited liability companies. This means shareholders’ liability is limited by shares, protecting personal assets from business debts. Unlimited liability companies are less common and require shareholders to cover debts beyond their investments.

What is the difference between a private company and a sole proprietorship?

A sole proprietorship is a business owned by one person. Unlike private companies, sole proprietorships are not separate legal entities, so the owner is personally responsible for all debts. Private companies protect shareholders’ personal assets and offer a more structured approach to ownership and liability.

Why do some companies remain private?

Private companies remain private to retain control over decision-making, protect financial privacy, and avoid the administrative burden of public reporting. Remaining private allows businesses to focus on long-term goals without the pressures of meeting quarterly earnings expectations or public market scrutiny.

How do private companies raise funds?

Private companies rely on private funding sources, such as investments from private investors, venture capital, or retained earnings. Unlike public companies, private companies cannot offer shares to the public, limiting their ability to raise large-scale funding quickly.

Are there advantages to owning a private company?

Private companies offer flexibility in decision-making, privacy in financial matters, and the ability to focus on long-term growth. Owners can avoid the pressures of public market demands and quarterly reporting, which helps prioritise sustainable strategies over short-term profits.

Can a private company issue shares?

Yes, private companies can issue shares, but these are offered only to a limited group of investors or shareholders. Shares are not publicly traded, which ensures ownership remains controlled and private.

What types of private companies exist in Australia?

In Australia, private companies include proprietary limited companies (Pty Ltd), unlimited private companies, and companies limited by guarantee. Pty Ltd companies are common for profit-making businesses, while companies limited by guarantee are usually non-profits focusing on community benefits.

Do private companies publish annual financial reports?

Private companies are not required to disclose annual financial reports to the public unless specified by law. This reduced reporting obligation helps maintain financial privacy and minimises administrative costs compared to public companies.

What is the role of the Securities and Exchange Commission?

The Securities and Exchange Commission (SEC) oversees public markets in the US, ensuring fair trading and transparency. Although private companies are not directly governed by the SEC, they must follow legal frameworks for private transactions. In Australia, ASIC performs a similar role.

What happens if a private company is wound up?

If a private company is wound up, shareholders with limited liability are responsible only for the unpaid value of their shares. Companies limited by guarantee require members to contribute a pre-agreed amount. Unlimited liability companies may require shareholders to cover all outstanding debts.

 

Understanding private companies

Private companies play a vital role in driving the global economy. Their flexibility, privacy, and ability to focus on long-term goals make them an appealing choice for entrepreneurs and investors. While they face challenges like limited access to public funding, these obstacles are often balanced by their freedom from stringent regulatory requirements and stock market pressures.

The decision to start, invest in, or transition a private company involves weighing its benefits and challenges. With careful planning and informed strategies, private companies can thrive, fund their growth, or even explore the path of going public. Whether you are considering founding a business or investing, understanding the dynamics of private companies is the first step toward making smart decisions that align with your goals.

Take the next step with Business Kitz—your trusted partner for professional resources and templates to streamline your private company operations. Simplify compliance, planning, and growth with our expertly crafted tools designed to empower your business success.

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