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What is the private sector?

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Last editedJune 20212 min read

Whether you’re looking at job listings or reading the latest finance news, you’ll probably see references to both the public and private sector. The private sector is profit-driven, taking on a central role in the country’s economic development. We’ll define the private sector definition below and highlight how it differs from the public sector.

Private sector definition and role

The private sector refers to the part of the economy that isn’t controlled by the state. It includes any for-profit businesses run by individuals or companies. Businesses controlled by the government are part of the public sector, while charities or other non-profits are part of the voluntary sector. The balance between public and private sectors will vary according to a country’s economic and political philosophy.

The private sector plays an important role in the economy through the following functions:

  1. Job creation through generating employment opportunities within private companies

  2. Contribution to tax revenues and capital flow through the economy

  3. Provides goods and services to both consumers and businesses

  4. Attracts investors both domestically and internationally

  5. Enhances business diversification and competition between companies

Essentially, the private sector is a fundamental component of a free economy, driving development through business opportunity.

Private sector characteristics

While the private sector is home to many different types of businesses, there are a few characteristics that they all tend to share.

  1. Profit: The primary drive behind any business in the private sector is profit. While there may be other goals involved as part of core company values, private sector businesses strive to see a return on investment and increase year-on-year net profit.

  2. Independence: Responsibility for business actions sits squarely on the shoulders of the business owner or management. The business is free to operate without outside control or government interference.

  3. Private finance: There are many ways for a private sector business to obtain start-up capital, whether it’s through shareholders, private loans or investment activities.

  4. Private ownership: Private sector organisations are owned and controlled by entrepreneurs, private individuals, or groups of people. They are not owned or managed by government entities.

A final characteristic of the private sector is its competitive work culture. Employees and business owners alike are driven by a sense of competition, seeking career growth and profit. Businesses strive to attract top talent through an attractive compensation package.

Public and private sector comparison

Now that we’ve gone through the private sector definition and features, how does it compare to the public sector? Like a private sector business, the public sector also employs workers to accomplish its tasks. However, workers are employed at the federal or local government level. Public service jobs typically involve administrative, healthcare, teaching, armed forces, and emergency services. Workers are paid through government funds, often tax dollars. By contrast, private sector employees are paid from company profits.

Private sector examples

You’ll find private sector examples in nearly every industry, with small and medium-size businesses represented alongside larger corporations. Here are a few examples of typical businesses that help form the economy’s private sector:

  1. Sole proprietorships: privately-owned small businesses like contractors, designers, and technicians

  2. Partnerships: examples include small legal firms, accounting practices, and dental offices

  3. Privately owned corporations: larger firms in the leisure, retail, and hospitality industries

  4. Multinational corporations: corporations with over 500 employees are the most notable members of the private sector, holding considerable sway over the economy

  5. Non-profit organisations: while they may receive special tax considerations or government grants, many charities are privately owned and operated

The bottom line

Both private sector businesses and public sector offices work together to form a fully functioning economy. At times, they can work together on common goals. For example, private sector businesses might use government assets or resources to assist with public services. Yet for most start-up entrepreneurs, the private sector is where you will operate.

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