What Are Private Entities?

Are private entities the same as private companies? How do private entities gain funding? If you're curious about what exactly a private entity is and what makes them different from public companies, then this article is for you.

You may already know that private entities are privately owned businesses, but there's a lot more to them than that. Continue reading to learn how private entities work and what makes them different from private companies.

What is a Private Entity?

There are a few groups that can be considered a private entity in the business world. A partnership, corporation, individual, nonprofit organization, company, or any organized group that is not government-affiliated can be considered a private entity.

Because private entities are not publicly-traded companies, they do not have public stock offerings on Nasdaq, American Stock Exchange, or the New York Stock Exchange. They do offer private shares to investors who can trade among themselves.

This means that they do not need to meet the Securities and Exchange Commission's (SEC) strict filing requirements that public companies do. That means their shares are less liquid, and their valuations are harder to determine.

How Do They Work?

A private entity relies on a small group of chosen investors in order to grow and fund their business. This could be employees, colleagues, friends, family, or even large institutional investors. Interested parties are able to support the private entity in order to help the company grow.

Once it reaches a certain size, a private company may eventually decide to go public. This means they are able to have an IPO or initial public offering of stock shares on a public exchange. However, many private companies prefer to remain private to maintain family ownership or avoid the high costs of an IPO.

It is also possible for a public company to go private if a large investor buys out the majority of the stock shares and removes them from public exchanges.

Private Companies vs. Private Entities

The difference between a private entity and a private company is that a private entity is not determined based on the Companies Act of 2013. Instead, they are determined by ownership and holding. Sole proprietorships and partnerships are examples of private entities.

A sole proprietorship is a small business that is owned by an individual. They are the easiest way to organize a company in the U.S. They are set up to create a financial structure that makes the owner and company itself the same person for legal purposes.

All private companies are private entities, but not all private entities are private companies that are registered under the Companies Act of 2013.

How Do Private Entities Trade Stocks?

Shareholders of private companies receive dividends and profits from their stocks, just like public companies. However, there are some major differences that exist. Buyers and sellers of private shares must set their own prices and negotiate sales themselves. 

It can be difficult to figure out the worth of private shares since they aren't traded often. Plus, no set price exists for the shares. They do not need to report trades to the SEC. This means privately-owned companies tend to be subject to fewer government regulations than publicly-traded companies. However, there is also a greater risk when becoming a shareholder of a private entity. 

How to Get Started

Now that you know the facts about private entities, you may be wondering how to get started investing in one with your self-directed IRA. To learn more, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.