There quite a few problems with privatizing something as controversial as the military.
a) Mercenaries are not recognized as lawful combatants under UN Protocol Additional GC 1977. In such a case, in the countries that recognize the UN protocol, they will be subject to domestic laws. Their actions will be considered crimes, not acts of war. This means they can be thrown into prison, executed... etc etc, they will not be a prisoner of war.
b) PMCs will not be directly controlled from the governmental system we elect. Sure we might have partnerships and agreements, but we lose many political 'checks' in the system of decisions. This makes war crimes ambiguous, accountability is lost in the system of money. Remember there is a reason bureaucracy exists, its so that no one person or organisation gets too much power.
c) Another fundamental use of the military, is that they are ultimately controlled by civilians. If privatizing happens to an entire military force, we may be shareholders, but we do not control them, we have no idea what they might be doing, what they are hiding from us. Of course, this analogous to any totalitarian military dictatorship where civilians are always in the dark, but I'm coming from republican standpoint. This all raises another problem, to what laws and regulations (torture policy, civilian casualty policy, rules of engagement... etc) do the PMCs follow? If its a domestic PMC it will may follow the laws of the country, but what about an international PMC? Where it has bases everywhere and is willing to hire out guns and bombs to any country with the largest bid.
d) How far are we willing to privatize military applications, where will it stop? Can you be comfortable with nuclear arsenal being controlled by a bunch of men/women driven by profit?
e) It's very dangerous, it's dangerous to government itself, if the entire military is privatized, it could very easily turn its back on its own country, very easy to do in times of chaos. It could even subtly do it, as PMCs get more and more powerful, as if to control the entire military, they will demand to be part of the government's foreign policy. (And why the heck not? If I control every single tank, aircraft, bomb, soldier, I should be able to control the foreign policy of my country.)
f) What happens when the economy goes down? Does the PMC go take out a loan, retrench its staff or even worse start selling its assets to keep afloat? Do we have to bail out the PMC if somehow it managed to get bankrupt, what happens when we're in war and it managed to get bankrupt? Whats stopping another country buying out our PMC if we did not bail them out? We will have no military at all....
Lastly, its dis-honorable, but hey.. we've already thrown that out of the window, while we're at it. Let's privatize the government, and the legal system too. We can have a monetary anarchist country. Constitutional laws will be made by the highest bidder.
One quote I remember off a movie called Crimson Tide, the captain said: "We're here to preserve democracy, not practice it." However I was thinking that in their isolated situation, their definitely not practicing democracy however the military in general is ultimately controlled by a democratically elected leader. If we privatize the entire military, we lose that distinction don't we?
Having the ability to call up a private military organisation is a great political tool, but giving your entire military away to a PMC is just going too far in my opinion. More information can be found here:
http://www.informationclearinghouse.info/article3396.htm