Question

What are some of the government requirements imposed on a public corporation that are not imposed on a private, closely held corporation? Discuss pros and cons of each

Answer 1

Answer:

The government (the SEC) imposes several regulations on publicly traded corporations and requires mandatory reporting regarding their financial position, compensation to key employees, auditing and accounting procedures, conflicts of interest between upper management and shareholders, operating results, etc.

The pros of that large amount of reports is that it makes management accountable for what happens and it makes their job more transparent.

The downside is that they are expensive and time consuming.

On the other hand, privately held corporations decide what to disclose to the general public or the government. The IRS is something that cannot be avoided, but the SEC and its scrutiny is avoided.

Other advantages of publicly held corporations:

• a publicly held corporation should be able to raise larger amounts of capital
• since the number of owners is larger, debt per ownership stake is generally much lower
• top management tends to be more independent and suffer less pressures from individual stockholders
• publicly trades corporations tend to receive more publicity and are better known
• they also attract more talent

Other disadvantages of publicly held corporations:

• publicly held corporation have a lot of owners and they all have the right to be informed about what happens within the corporation and vote to elect the board of directors
• some decisions require that shareholders vote on them, e.g. mergers
• stock prices suffer from market risk
• going public is also expensive