Public Corporation

Published Sep 8, 2024

Definition of Public Corporation

A public corporation, also known as a publicly traded company or publicly held company, is a corporate entity where ownership is distributed among general public shareholders through freely traded shares in public markets such as stock exchanges. These corporations are subject to stringent regulatory requirements and are obligated to disclose significant amounts of information to ensure transparency and protect investors. Examples of public corporations include household names like Apple, Microsoft, and Amazon.

Example

Let’s take an example of a well-known public corporation: Amazon. Founded by Jeff Bezos, Amazon started as an online bookstore in 1994 and went public in 1997. As a public corporation, Amazon’s shares are listed on the NASDAQ stock exchange, making it possible for the general public to buy, sell, and trade its stock. The company must comply with regulations by the Securities and Exchange Commission (SEC), which includes regular filings of financial statements, annual reports, and other relevant information to give investors a clear picture of its financial health, business operations, and market position.

The public nature of Amazon allows it to raise capital from a broad array of investors, including individual and institutional investors. This enables Amazon to finance its growth, invest in research and development, expand its operations internationally, and pursue various business ventures and acquisitions.

Why Public Corporations Matter

Public corporations are pivotal components of the modern economy for several reasons:

• Capital Formation: By issuing shares to the public, these corporations can amass substantial capital that can be invested in growth initiatives, technological development, and innovation. This influx of capital fuels economic development and job creation.
• Market Liquidity: Since shares of public corporations are traded on stock exchanges, there is greater liquidity. Investors can quickly buy or sell shares, providing accessibility and flexibility.
• Transparency: Public corporations are bound to rigorous disclosure standards which enhance transparency and investor protection. This builds investor confidence and fosters trust in the financial markets.
• Corporate Governance: The requirement to disclose operations and performance metrics, coupled with scrutiny from shareholders and regulatory bodies, often leads to more robust corporate governance practices within public corporations.

Frequently Asked Questions (FAQ)

What are the major differences between public corporations and private corporations?

Public corporations are owned by shareholders who have purchased stock on public exchanges, while private corporations are owned by a smaller group of private investors. Public corporations are subject to more stringent reporting and regulatory requirements than private corporations, including obligations to file quarterly and annual reports with the SEC. Conversely, private corporations are not required to disclose their financial information to the public, allowing them more operational privacy. Also, raising capital in public corporations is more accessible through public stock offerings, while private corporations rely on private equity and venture capital.

What are the potential downsides or challenges of being a public corporation?

Several challenges and downsides accompany the status of being a public corporation:

• Regulatory Compliance Costs: Public corporations incur significant costs related to compliance with regulatory requirements, including legal, accounting, and administrative expenses.
• Short-term Pressure: Public corporations often face pressure from shareholders and analysts to meet short-term financial targets, which can sometimes detract from long-term strategic goals.
• Loss of Control: Founders and original owners may lose a degree of control over the company as ownership becomes widely dispersed among public shareholders.
• Vulnerability to Market Volatility: The stock prices of public corporations can be highly volatile and influenced by market sentiment, economic conditions, and other external factors.

How does a company go public and what are the steps involved in an initial public offering (IPO)?

The process of going public generally involves several steps:

1. Preparation: The company assesses its readiness to go public, including financial health, internal processes, and market conditions. This stage also involves hiring investment banks, often referred to as underwriters, to guide the process.
2. Due Diligence and Filings: Detailed due diligence is conducted, and the company must file a registration statement, typically a Form S-1, with the SEC. This document contains detailed information about the company’s business model, financials, risk factors, and use of proceeds from the IPO.
3. SEC Review: The SEC reviews the registration statement and may provide comments and request revisions. This stage can take several months depending on the complexity and completeness of the initial filings.
4. Marketing: Once SEC approval is granted, the company and its underwriters embark on a “roadshow” to pitch the stock to institutional investors. They gather feedback and gauge interest in the offering to help set the final offer price.
5. Pricing and Offering: Based on investor feedback, the final offering price and the number of shares to be sold are determined. On the day of the IPO, the shares are offered to the public on a stock exchange, where trading begins.

These steps culminate in a company transitioning from a privately-held entity to a public corporation, enabling it to raise capital from a wide pool of investors and embark on a new phase of growth and development.