It's important to understand the difference between the public sector and the private sector when discussing public and private companies. This guide will go over the definition of a private enterprise, explaining how private companies work and covering some of the advantages and disadvantages associated with private enterprises, too.
What Is a Private Enterprise?
Let's begin with a simple private enterprise definition to understand what private entities are and how private and public organizations differ. In simple terms, a private enterprise is one that has private ownership, rather than public ownership.
These companies can issue their own stocks and have shareholders too, but they aren't able to sell shares via public exchanges or IPOs. They run independently, not associated with the government or public services. Examples include clothing stores and legal firms or credit unions in the corporate sector.
It's also important to note that, in most locations, private entities are subject to external rules and regulations to enforce certain standards of ethics, legality in labor, and so on. So, despite being privately-owned and operated, these enterprises still need to adhere to public laws and standards.
Private enterprises are a big part of any free market, empowering individuals to be able to start their own businesses and bring their ideas and innovations to the market and create their own wealth in the process.
4 Key Features of Private Enterprises
The main distinguishing feature of private businesses as compared to public companies is that they are managed privately, without any influence or involvement from the government. Here are some additional features that help the private sector and private enterprises stand out:
- Motive: The main motive of private enterprises is to make a profit. This isn't the case with the public sector, which is more focused on providing essential services or infrastructure for the public.
- Financing: Private enterprises can obtain financing in a range of ways. Often, private business owners need to raise their own capital to start their businesses, seek out the assistance of investors and shareholders, or take loans. Private enterprises will usually not receive much governmental support unless they are of a certain level of status and influence.
- Private Control: Private business owners and management teams are the people who make the decisions for these businesses. There can be one decision-maker or several, but the key feature is that there is no state or governmental participation on the decision-making process.
- Competitive Culture: There's a lot of competition in the world of private enterprises, which does not exist in the same way in the public space, as private businesses are often vying to be leaders in their respective industries, with the most profits and customer attention. This competitive nature can result in different working conditions and environments for private-sector workers.
How Do Private Companies Work?
Private enterprises or privately-held companies can work in a number of different ways and fall into different categories, depending on their structure and ownership style. Some of the main varieties of private enterprises include S-corps, C-corps, and LLCs.
They can have very different sizes and scales, too. A small independent bakery, for example, can be classed as a private enterprise, and so too can a globally-known smartphone brand or technology company.
Private companies can therefore work in various ways, depending on the industry they're operating in and the scale of their operations.
They have access to bank loans and other financial services too, but many larger private companies eventually choose to go public in order to raise more money as they evolve and expand.
5 Private Enterprise Structure Types
As explained above, the structure of a private enterprise can vary, with several different types of private companies, each with its own unique features and aspects. Here are some brief breakdowns of the main structures:
- Sole proprietorship
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1. Sole Proprietorship
A sole proprietorship is a private company that has one single owner. All of the assets and liabilities for the company rest on that individual's shoulders, and they also have full decision-making powers for the enterprise too.
A partnership is another structure variant for a private enterprise in which there are at least two co-owners of the company, sharing liabilities, responsibilities, and profits. The partners also share the rights to make decisions for the company.
An LLC, or limited liability company, is a type of private enterprise that typically has several owners, with the owners sharing responsibilities, much like a partnership. However, the big difference with an LLC compared to a partnership is that the owners have some protections for the business’s debts and liabilities and can't be personally pursued for company debts.
An S-corp, or S-corporation, is a private company with 100 shareholders or fewer and can pass income on to those shareholders without having to pay federal tax, combining the tax-free benefits of partnerships with the advantages of incorporation.
A C-corp, or C-corporation, is another type of private enterprise entity that is also the most common kind of corporation. C-corps are run a lot like S-corps, but they have no limit on the number of shareholders. However, they are subject to income taxation.
Private Enterprise Is Essential for the Free Market
Private enterprises and the private sector at large play a pivotal role in many countries and are an essential part of the free market. Hopefully, this guide has provided a clear and informative explanation of how they work and why private enterprises are so important in today's world.