In order to become publicly listed, a company needs to complete an Initial Public Offering (IPO) explains Aron Govil. This will allow them to trade their shares on an exchange, such as the NYSE and NASDAQ.
You may be wondering why a company would go through all this just to have their stock bought by the general public.
Well, it turns out that there are several benefits for companies that can be realized by becoming publicly listed.
- First off, being publicly listed allows the company’s management to raise capital directly from investors. The more money they have at their disposal, the better cameras they will be able to buy! Yay technology advancements!
- Secondly, being publicly list means easier liquidity for shareholders. Liquidity refers to how easy it is for shareholders to sell or buy shares of stock – if there is high liquidity then shareholders can find buyers or sellers very easily without affecting the price of the stock.
- Lastly, being publicly list can open up a new pool of potential investors. Publicly list companies are require to disclose their financial information in quarterly reports and annual filings – this information is widely available for free on many financial websites, which makes it easier for investors to do research before deciding whether or not to invest in the company. This means that potentially useful shareholders are expose to more opportunities!
Ongoing Compliance Costs vs. Time Spent Meeting with Investors
So how much work is there really involved with maintaining these benefits?
There are several ongoing compliance costs that public companies must bear, so let’s discuss some of them below:
Annual shareholder meetings –
These cost $2-$5k if held in-person, $500 if conducted over the phone. They must be hold once a year and allow shareholders to vote on company matters says Aron Govil. At this meeting, you will also have the opportunity to meet with your potential investors in person!
Filing quarterly reports and annual 10K reports –
These documents must be file within 45 days of quarter end or 90 days after fiscal year end. The costs involved depend on how much activity is happening at the company during the reporting periods, but for most small companies it should cost between $2-$5k per filing.
Annual audit fees –
Publicly listed companies are require to pay their accounting firms (usually an external firm) around $10k/year for an audit of their annual 10K reports. This fee is waive if you submit an 8-K saying that your company meets certain qualifications for “Fully-Compliant” status (see below).
So what do these compliance costs look like in the grand scheme of things? Well, let’s say you’ve got a 100 employee company bringing in $10mm/year in revenue and it takes about 20 hours per week to manage all of the required filings. You can expect your overhead cost to increase by $70-$100k annually over companies that are not publicly list. That may sound like a lot, but it’s really just ~1% of your profits – which doesn’t seem so bad when you consider that the benefits I mentioned earlier outweigh this cost.
What about just starting out as a privately held company, then? How much does that cost?
Privately held companies are not require to disclose their financial information or compliance documents to the public – this makes it easier for them to manage their business and focus on other aspects besides filing reports.
There are other requirements for privately held companies which I’ll summarize below:
- must have registered with D&B (if sales/revenue exceeds $1mm)
- must prepare annual state tax returns (like LLCs)
- no shareholder meetings unless requested by shareholders
- But even then, they’re not require to be held!
- can set up stock option plans for employees without shareholder approval
The initial cost of maintaining a privately held company is quite low. It’s much less than the costs involved when going public says Aron Govil. However, this route does not expose your business to as many investors. And has higher long term compliance costs (taxes and stock option plans, for example). If you like managing things yourself or if investors aren’t important to you. Then this may be the best route for you!