A company that is publicly held is one that has raised capital for its operations by offering sale of its stock to the public. In this way, it differs from privately owned companies, in which the ownership of the company is solely in the hands of those who founded it or are directly involved in operations. Companies can go from privately owned to publicly held by means of a initial public offering, or IPO, of its stock. Public companies can raise money through sale of their stock to the public but must answer to shareholders about the company's operations.
Most companies start as privately owned small businesses, with ownership of the company belonging to those who founded the company. Even companies from modest beginnings, however, most likely aspire to take up a large portion of the market in their particular industry. To accomplish that, the company will have to raise enough capital to compete with industry titans. Publicly held companies can accomplish this financial goal by selling shares of their stock to the public on the open market.
Those companies that are publicly held have certain sets of rules to which they all must adhere. The company itself must be a corporation, which is a legal entity that is separate from the actual ownership of the company. In addition, all public companies are required by the United States Securities and Exchange Commission (SEC) to disclose to their shareholders financial information such as earnings reports. By contrast, privately owned companies need not be corporations, although they can be, and they do not have to yield any information about their finances.
The first step to any company becoming publicly held is an initial public offering, in which the company becomes a stock on the open market, free for any investor to buy. These investors then become the shareholders of the company, which, in essence, means they have part ownership in conjunction with other shareholders, a group collectively known as the preferred owners, and the original owners, who are known as the common owners. Preferred owners can lose money if the stock of the company falls but are not responsible for any debt incurred by the company, a burden that falls on the common owners.
Publicly held companies usually have a board of directors that serves as a buffer group between shareholders and management and operations officials. The board of directors has the responsibility of hiring key management positions to ensure that the business is profitable. If not, the shareholders of a company can possibly vote in a new board of directors to make decisions on their behalf.