Financial Reporting Requirements for Small Private Companies in the United States

Small private companies in the United States are not required to file periodic reports with the U.S. Securities and Exchange Commission (SEC). However, owners, lenders and other stakeholders still expect reliable, decision-useful financial statements. This article explains the classic set of financial statements that small private companies should produce each year, and how those statements fit into the official U.S. standard-setting framework led by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA).

Regulatory context for small private companies

No SEC filing requirement for private companies

Under U.S. federal securities laws, public companies that issue securities to the public must register with the SEC and file regular reports such as Forms 10-K and 10-Q. Most small private companies do not register their securities and therefore are not required to file periodic reports or provide SEC-style disclosures. This means their external financial reporting is governed primarily by contracts (for example with banks) and by the expectations of owners and other users of their financial statements, rather than by SEC rules.

For that reason, the “financial reporting requirements” for small private companies are less about legal filing obligations and more about producing a consistent set of financial statements that lenders, investors and other stakeholders can understand and trust.

FASB, GAAP and the Private Company Council

In the United States, U.S. Generally Accepted Accounting Principles (U.S. GAAP) are set by the Financial Accounting Standards Board (FASB). GAAP applies to both public and private entities, although public companies face additional SEC-driven disclosure and filing requirements. To ensure that private-company perspectives are reflected in GAAP, the FASB has established the Private Company Council (PCC), which advises on possible alternatives within GAAP for private-company financial reporting.

The FASB and PCC have also developed the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies. This framework explains how standard-setters consider when to provide alternative recognition, measurement, disclosure or transition requirements for private companies.

AICPA Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs)

Many small private companies do not need full GAAP financial statements. For these entities, the AICPA has created a special purpose framework called the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs). The framework is designed for “Main Street” businesses that need reliable financial statements for owners, lenders and other users, but are not required to issue GAAP financial statements.

You can read the AICPA’s overview article “Financial reporting framework for small and medium size entities” and access the full framework text via the AICPA resource “Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs)”. The full text of the framework is also available as an AICPA publication, for example through the document “FRF for SMEs Accounting Framework”.

The FRF for SMEs is not a substitute for GAAP when GAAP financial statements are required, but it offers a simpler, cost-effective basis of accounting in situations where GAAP is not mandated, such as many small private companies.

“Classic” financial statements small private companies should produce

Whether a small private company follows U.S. GAAP or a special purpose framework such as the AICPA’s FRF for SMEs, the core reporting package typically consists of the same classic financial statements. Producing these statements annually (and often quarterly for management and lenders) gives users a complete picture of the entity’s financial position, performance and cash flows.

Balance sheet (statement of financial position)

The balance sheet presents the company’s assets, liabilities and owners’ equity at a specific date, usually the end of the fiscal year. For a small private company, the balance sheet normally includes:

• Cash and cash equivalents
• Trade receivables and other short-term assets
• Inventory and other operating assets
• Property, plant and equipment and any other long-term assets
• Trade payables and other current liabilities
• Loans, lines of credit and other longer-term debt
• Owners’ equity (for example, members’ capital in an LLC or retained earnings in a corporation)

A well-prepared balance sheet helps owners and lenders assess liquidity, solvency and the company’s overall financial health.

Income statement (statement of operations)

The income statement summarizes revenues and expenses over a period (for example, one year), showing whether the company earned a profit or incurred a loss. For a small private company, common line items include:

• Sales or service revenue
• Cost of goods sold or direct costs
• Gross profit
• Operating expenses (such as payroll, rent, marketing and administrative costs)
• Interest expense and other non-operating items
• Income tax expense (if applicable)
• Net income or loss

Consistent income statements allow users to track profitability trends and compare performance across periods.

Statement of cash flows

The statement of cash flows explains how cash moved in and out of the business during the period. It is typically organized into three sections:

• Cash flows from operating activities (for example, cash received from customers, cash paid to suppliers and employees)
• Cash flows from investing activities (for example, purchases of equipment or proceeds from asset sales)
• Cash flows from financing activities (for example, borrowings, repayments of debt, contributions from and distributions to owners)

For companies that follow U.S. GAAP, a statement of cash flows is a core financial statement. Under the FRF for SMEs, the statement of cash flows is also part of the recommended set of financial statements, although the framework provides flexibility appropriate for small entities.

Statement of changes in equity

The statement of changes in equity (sometimes called the statement of owners’ equity or statement of retained earnings) reconciles opening equity balances to closing balances. Typical components are:

• Opening balances of contributed capital and retained earnings
• Owner contributions (for example, capital injections)
• Owner distributions (such as dividends or draws)
• Net income or loss for the period

For small private companies with simple capital structures, this information can be presented as a separate statement or incorporated into the notes. GAAP and the FRF for SMEs both permit flexibility in how the changes in equity are presented, as long as the information is clear and complete.

Notes to the financial statements

The notes explain the accounting policies and provide additional detail that is not obvious from the primary statements alone. For small private companies, key note disclosures typically include:

• A description of the reporting framework used (for example, U.S. GAAP or “AICPA Financial Reporting Framework for Small- and Medium-Sized Entities”)
• Summary of significant accounting policies (revenue recognition, depreciation, inventory valuation, and so on)
• Details of major debt arrangements and covenants
• Information about leases, guarantees and other commitments
• Related-party transactions, if any

Both U.S. GAAP (for private entities) and the FRF for SMEs emphasize disclosures that are decision-useful to the typical users of small-entity financial statements, rather than extensive public-company style disclosure packages.

Choosing an appropriate reporting framework

GAAP-based financial statements for small private companies

Many small private companies choose to prepare financial statements in accordance with U.S. GAAP, often because banks, private equity investors or other capital providers are familiar with GAAP and may require GAAP-compliant financial statements in loan agreements or other contracts. In such cases, the entity applies the recognition and measurement guidance in the FASB’s Accounting Standards Codification and prepares the classic set of statements described above.

When GAAP is used, the FASB and the Private Company Council may permit specific “private-company alternatives” that simplify certain accounting areas for nonpublic entities, guided by the Private Company Decision-Making Framework. These alternatives are still within GAAP, but they are tailored to the needs of users of private-company financial statements.

AICPA FRF for SMEs as a non-GAAP option

If GAAP financial statements are not required by law or contract, small private companies may use the AICPA’s FRF for SMEs as their basis of accounting. According to the AICPA, the FRF for SMEs is designed to provide:

• Useful, relevant information to owners, lenders and other users
• A simplified and consistent reporting framework
• A cost-effective alternative when full GAAP is not necessary

The FRF for SMEs outlines which primary financial statements should be presented and provides detailed guidance on recognition, measurement and disclosure suitable for small- and medium-sized entities. The framework is fully described in the AICPA resources: overview article and framework document.

Practical “minimum annual reporting package” for small private companies

Putting the pieces together, a practical “classic” annual reporting package for a small private company in the United States will usually include:

• Balance sheet as of the fiscal year-end
• Income statement for the fiscal year
• Statement of cash flows for the fiscal year
• Statement of changes in equity (or equivalent information presented in the notes)
• Notes to the financial statements that describe the reporting framework and key policies

Depending on the needs of owners and lenders, companies may also prepare interim (for example, quarterly) financial statements following the same structure on a condensed basis.

Role of CPAs, audits and reviews

While U.S. federal securities laws do not require small private companies to obtain audited financial statements, many stakeholders place significant value on having the financial information prepared, compiled, reviewed or audited by a licensed Certified Public Accountant (CPA). The AICPA sets professional standards and ethics for CPAs in the United States, and CPAs use both the FASB’s GAAP framework and the AICPA’s FRF for SMEs when preparing or attesting to financial statements, depending on the applicable basis of accounting.

For some entities, a compilation or review engagement may provide sufficient assurance for lenders at lower cost than a full audit. The type of engagement and level of assurance should be aligned with the expectations of financial statement users and the complexity of the company’s operations.

Key takeaways for owners and managers of small private companies

For owners and managers of small private companies in the United States, the core messages are:

• You are generally not required to file financial statements with the SEC, but stakeholders still expect reliable and understandable reporting.
• The FASB provides the U.S. GAAP framework for both public and private entities, while the PCC tailors GAAP where appropriate for private companies.
• The AICPA’s FRF for SMEs offers a streamlined, non-GAAP option when GAAP financial statements are not required.
• Regardless of the framework, producing the classic set of financial statements (balance sheet, income statement, cash flows, changes in equity and notes) each year is a best practice for small private companies.
• Working with a qualified CPA helps ensure that your financial statements meet the expectations of lenders, investors and other users.

By adopting a clear reporting framework and producing a consistent, high-quality set of financial statements, small private companies can support better decision-making, improve access to credit and investment, and strengthen confidence in their financial information.