When a privately owned company decides to distribute its

shares to the general public, it goes through a process known

as an initial public offering $($IPO$).$ There are a number of

advantages to having a firm's shares traded in the public equity

market, including the following:

New capital is raised. When the firm sells its shares to the

public, it acquires new capital that can be invested in the firm.

The firm's owners gain liquidity of their share holdings.

Publicly traded shares are more easily bought and sold, so the

owners can more easily liquidate all or part of their invest$-$

ment in the firm.

The firm gains future access to the public capital market.

Once a firm has raised capital in the public markets, it is easier

to go back a second and third time.

Being a publicly traded firm can benefit the firm's

business. Public firms tend to enjoy a higher profile than

their privately held counterparts. This may make it easier to

make sales and attract vendors to supply goods and services

to the firm.

However, all is not rosy at a publicly held firm. There are a

number of potential disadvantages, including the following:

Reporting requirements can be onerous. Publicly held

firms are required to file periodic reports with the Securities

and Exchange Commission $($SEC$).$ This requirement is not

only onerous in terms of the time and effort required but

also some business owners feel they must reveal information

to their competitors that could be potentially damaging.

The private equity investors now must share any new

wealth with the new public investors. Once the firm is

a publicly held company, the new shareholders share on an

equal footing with the company founders the good $($and

bad$)$ fortune of the firm.

The private equity investors lose a degree of control

over the organization. Outsiders gain voting control over

the firm to the extent that they own its shares.

An IPO is expensive. A typical firm may spend $15$ to $25$ per$-$

cent of the money raised on expenses directly connected to

the IPO. This cost is increased further if we consider the cost

of lost management time and disruption of business associ$-$

ated with the IPO process.

Exit of the company's owners is usually limited$.$ The

company's founders may want to sell their shares through

the IPO, but this is not allowed for an extended period of

time following the IPO. Therefore, this is not usually a good

mechanism for cashing out the company founders.

Everyone involved faces legal liability. The IPO partici$-$

pants are jointly and severally liable for each others' actions.

This means that they can be sued for any omissions from the

IPO's prospectus should the market valuation fall below the

IPO offering price.

Carefully weighing the financial consequences of each of

these advantages and disadvantages can provide a compa$-$

ny$\text{'}$s owners $($and managers$)$ with some basis for answering

the question of whether they want to become a public

corporation.