What Is the Private Sector? Definition and Examples

The private sector is the part of the economy, sometimes referred to as the citizen sector, which is owned by private groups, usually as a means of establishment for profit or non profit, rather than being owned by the government.

Private Sector vs. Public Sector

What is the role of the private sector?

The role of the private sector is integral to the development of an economy. Here are some specific roles of the private sector:

What is the private sector?

The private sector constitutes the segment of the economy owned, managed and controlled by individuals and organizations seeking to generate profit. Companies in the private sector are usually free from state ownership or control. However, sometimes the private sector can collaborate with the government in a public-private partnership to jointly deliver a service or business venture to a community. A private sector company can come to existence through the privatization of a public organization or through a new enterprise by private individuals. Businesses in the private sector stabilize prices by creating fair market conditions.

Main features of the private sector

The main feature of the private sector is its management by private individuals without government involvement, but there are more features of the private sector:

Profit motive

The primary focus of companies in the private sector is making a profit. By operating within the regulations and compliances of the respective country, companies in the private sector typically manage to realize more profits compared to firms in the public sector. Additionally, profits provide reward for the risk taken and the required return on capital.

Private ownership and control

Private entrepreneurs are responsible for owning, controlling and managing the private sector. The management may be either by a single individual or by a group of people. When the ownership belongs to a single person, the private sector company is referred to as a sole proprietorship. Alternatively, a group of persons may jointly own a firm in the form of a cooperative society, partnership or a joint-stock company.

No state participation

Private sector entities have less exposure to government interference. There is no participation by the state or central governments in the ownership and control of a private sector undertaking.

Independent management

The management of the private sector relies entirely on its owners. In the case of a sole proprietorship, the manager makes all of the decisions and acts on behalf of the company in legal matters. On the other hand, the management of a joint-stock company depends on a group of directors who are elected representatives of the shareholders.

Private finance

The private sector obtains capital from its owners or shareholders. Different types of private sector undertakings have varied means of raising capital. A sole trader contributes capital for a sole proprietorship, and partners invest capital in case of a partnership. Alternatively, a joint-stock company raises capital through the issue of share and debentures (a type of long-term debt). Requesting loans for long- and short-term needs or funds is also another way the private sector raises capital.

Private sector companies receive very little financial support from the government unless they are large and significant for a country. Depending on the financial strength of the private sector, companies with stronger financials have better capacities to mobilize more funds from the market.

Work culture of employees

The private sector has a competitive work culture, characterized by performance-based career growth and better compensation. Private sector companies strive to create the best work environment for their employees to maintain a competitive advantage over other firms in the private sector.

Examples of companies in the private sector

There are numerous types of undertakings in the private sector. Some of the examples of the private sector include:

Privately owned small- and medium-size businesses

These businesses constitute the bulk of the private sector. Small and medium businesses are responsible for most of the jobs in the economy and range from firms with a single employee to companies with up to 500 employees. Small professional corporations, like doctors and lawyers offices, also fall under this category.

Examples include:

Large multinational corporations

Corporations that employ 500 or more people are considered large. Firms under this classification are the most prominent members of the private sector. Their importance results from exerting considerable political and economic influence. Government agencies exercise regulations on them but do not control them.

Nonprofits

Nonprofit organizations participate in activities perceived as publicly desirable, such as social services, education and natural resource conservation. Their main aim is delivering services for the general good and benefit of the community. While some nonprofits are self-sustainable, others depend on donations for financing. Nonprofits receive special tax considerations from the government.

FAQ

What are examples of private sector?

Examples of private-sector employment areas:
  • Financial services.
  • Law firms.
  • Estate agents.
  • Newspapers or magazines.
  • Veterinarians.
  • Aviation.
  • Hospitality.

What is a private sector and public sector?

Public sector organisations are owned, controlled and managed by the government or other state-run bodies. Private sector organisations are owned, controlled and managed by individuals, groups or business entities.

What are the 3 types of businesses in the private sector?

Types of Private Sector Businesses

Sole proprietorships. Partnerships. Small and mid-sized businesses.

What is the role of private sector in?

The private sector provides around 90% of employment in the developing world (including formal and informal jobs), delivers critical goods and services and contributes to tax revenues and the efficient flow of capital.

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