What Is the Private Sector? Meaning and Examples

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The private sector is the part of an economy owned and run by individuals and private organizations rather than by the government. It includes every business that is not state owned or state controlled, from a one-person freelance practice to a multinational corporation. Private-sector firms are generally organized to earn a profit, and they pay for themselves through what they sell rather than through tax revenue.

What the private sector includes

Ownership, not industry, decides which sector an organization belongs to. A hospital, a school or a bus company can sit in either sector depending on who owns and controls it. The private sector typically includes:

• Sole proprietorships, owned and run by one person
• Partnerships, owned by two or more people who share profits and liability
• Small and midsize businesses, including family firms and private limited companies
• Large corporations and multinationals, whether privately held or listed on an exchange
• Professional and trade associations, which represent businesses or occupations
• Trade unions, which are independent of the state even though they deal with employers and governments

Nonprofits and charities are also nongovernment bodies. Some definitions group them with the private sector; others treat them as a separate “third sector” because they do not distribute profits to owners.

How the private sector works

A private-sector business comes into existence when someone starts a new company, buys an existing one, or takes over an enterprise that the government sells off (privatization). Its owners supply capital, hire labor and combine them with land and know-how, the inputs described in the factors of production. The business then sells goods or services, and whatever remains after costs is profit for the owners.

Competition is the main discipline. Firms compete for customers on price, quality, convenience and innovation, and those that cannot cover their costs shrink, are sold or close, so private firms tend to respond quickly to changes in demand.

Independence from the government does not mean freedom from rules. Private businesses pay taxes (such as corporate income tax, payroll taxes and sales taxes collected from customers), obtain licenses, and follow labor, safety, environmental, consumer-protection and competition laws in each country where they operate.

The size of the private sector varies with the economic system. In market-oriented economies built on capitalism, such as the United States, most production and employment is private. In economies where the state owns or directs many large enterprises, as in China, the public sector plays a much bigger role. Most countries are mixed economies somewhere between these poles.

Example of the private sector

Hypothetical example. Maria opens a bakery with her savings and a bank loan. She is a sole proprietor, so the business is private sector from day one. She rents a shop, hires two employees and pays them from the bakery’s revenue. The city requires a food-safety permit and the state collects sales tax on her goods, but neither tells her what to bake or what to charge.

Five years later the bakery has grown into a chain, and Maria incorporates it and lists shares on a stock exchange. The company is now “public” in the sense that anyone can buy its stock, yet it remains in the private sector because private shareholders, not the government, own it. If the government instead bought a controlling stake and ran the chain, it would become a state-owned enterprise and move into the public sector.

Private sector vs. public sector

The public sector consists of government at every level and the organizations it owns or controls. In the United States, examples include federal agencies such as the Internal Revenue Service and the Department of Labor, state and local services such as police and fire departments, public schools, and the armed forces.

Employment differs too. Private-sector workers are paid from company revenue and often get more pay variation, a wider choice of careers and faster promotion for strong performers, but less job security, often less comprehensive benefits and sometimes longer hours. Public-sector jobs are paid from tax revenue and valued for stability and benefits; many become permanent after a probation period, but raises and promotions tend to follow set schedules. In the United States, private employers account for the large majority of jobs.

Public-private partnerships

The sectors are not sealed off from each other. In a public-private partnership (PPP), a private firm designs, finances, builds, owns or operates a public facility or service under a contract with the government. In a common structure, the toll-road concession, a company pays a state an upfront fee, then operates a stretch of highway for a fixed number of years and keeps the toll revenue. The government gets infrastructure without paying for it all at once, and the company takes on the cost and traffic risk in exchange for the income.

Governments also buy heavily from private firms through ordinary procurement, from office supplies to defense equipment, which links the health of the two sectors further.

Why the private sector matters

The private sector creates most jobs in market economies, produces most goods and services, and is a major source of new products and technologies. Its output makes up a large share of GDP, and the profits, wages and spending it generates form much of the tax base that funds the public sector.

Limitations of the private sector

Profit-seeking firms do not supply everything a society needs. Services that are hard to charge for, such as national defense or street lighting, tend to be underprovided by private markets. Firms may also ignore costs they impose on others, such as pollution, unless regulation or taxes make them account for them. Where one or a few companies dominate a market, competition weakens and prices can rise. Private employment is also more exposed to recessions, when weaker businesses cut jobs or close.

FAQs

The Bottom Line

The private sector matters to anyone choosing between private and government employment, starting a business or following how an economy is structured. It supplies most jobs, goods and services in market economies and much of the tax base, but it underprovides services that are hard to charge for and is more exposed to recessions. Regulation, taxes and public-private partnerships shape how the two sectors work together.