Like HowStuffWorks on Facebook!

How are privately and publicly held companies different?

Shareholders are joint owners of a corporation.

People who have an interest in a corporation buy shares of stock in the company. As part owners, they can vote on who will be on the board of directors, which is the decision-making body of the company and sets company policies. One of the decisions made by the board of directors is the total number of shares the company will have. How many shares there are and who owns them depends on whether the company is privately or publicly held. A publicly held company can have millions of shares that are bought and sold on the stock market and held by the public, and there is no limitation on who can buy or sell shares. In a privately held company, the number of shareholders is limited, and usually the shareholders all know each other. The shares are not sold to the public; instead, the shares are bought and sold among the closed number of shareholders.

Corporations are created to get a wider range of investors to invest money in a specific enterprise. If you have an idea for a business that needs millions of dollars that you don't have in order to start up, you can form a corporation that raises capital for the investment by selling shares. Stocks that are sold to the public for the first time are called IPOs, Initial Public Offerings. Whoever wants to invest in the company buys shares, the company raises money and the shareholders hope that the corporation will make a profit: Corporations that make a profit pay dividends to the shareholders. A corporation also operates in a way that limits the owners' liability. For example, if the corporation is sued, it is not an individual who is taken to court; it is the corporation as an entity. This reduces the individual risk to each of the shareholders.