Difference Between Public and Private Company

Edited by Diffzy | Updated on: September 21, 2022

       

Difference Between Public and Private Company Difference Between Public and Private Company

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Introduction

A company is an association of persons formed for business activities and has a legal status independent of its members. It can be described as an artificial person having a separate legal entity, perpetual succession, and a common seal. The company form of organization is governed by The Companies Act, 2013. As per section 2(20) of Act 2013, a company means a company incorporated under this Act or any other previous company law.

The shareholders are owners of the company, while the Board of Directors is the chief managing body elected by the shareholders. Usually, the owners exercise indirect control over the business. The capital of the company, is divided into smaller parts called shares.

A company can be either a private or a public company. A public company is a company whose shares can be traded freely on the stock exchange. A private company is a company whose shares may not be offered to the public for sale. In most situations, a private company is owned by its management and founders. A public company has sold all its stake or a portion of its stake to the public.

Public Company vs Private Company

The key difference between a private and public company is that private companies are generally smaller than public companies and that shares of a public company can be freely transferred while shares of a public company cannot be transferred. Public companies also have more reporting requirements than private companies. Both types of companies need to have promotors and maintain a memorandum of association and follow it. A public company is required to file a prospectus to invite the public to subscribe to its shares. However, a private company cannot issue a prospectus as it does not invite the public to subscribe to its shares.

Difference Between Public Company and Private Company in Tabular Form

Table: Public Company vs Private Company
Parameters of Comparison
Public Company
Private Company
Definition
A public company is a company that is allowed to raise funds by inviting the public to subscribe to its securities.
A private company is a company that restricts the transfer of shares and does not invite the public to subscribe to its securities.
Members
Minimum-7
Maximum-unlimited
Minimum-2
Maximum-200
Minimum number of directors
Three
Two
Index of members
Index of members is compulsory in a public company
Index of members is not mandatory in a private company.
Transfer of shares
There is no restriction on the transfer of shares from one person to another in the case of a public company
. There is a restriction on the transfer of shares from one person to another in the case of a private company.
Invitation to public to subscribe to shares
Can invite the public to subscribe to its share and debentures
Can not invite the public to subscribe to its securities.
Commencement of business
A public company can commence business only after it receives a certificate of commencement and certificate of incorporation.
A private company can commence business after receipt of the certificate of incorporation.
Minimum paid-up capital
The Minimum paid-up capital is rupees 5 lakh
The minimum paid-up capital is rupees 1 lakh.
Size
The size of a public company is usually large.
Private companies are generally smaller in size compared to public companies.

What is a Private Company?

A private company means a company that:

  1. Restricts the right of members to transfer their shares from one individual to another.
  2. Has a minimum of 2 and a maximum of 200 members, excluding the present and past employees.
  3. Does not invite the public to subscribe to its securities.

A private company must use the word private limited after its name. If a private company contravenes any of the aforesaid provisions, it ceases to be a private company and loses all the exemptions and privileges to which it is entitled.

Privileges of a private limited company as against a public limited company:

  1. A private company can be formed by only two members whereas seven people are needed to form a public company.
  2. There is no need to issue a prospectus as the public is not invited to subscribe to the shares of a private company.
  3. Allotment of shares can be done without receiving the minimum subscription.
  4. A private limited company can start the business as soon as it receives the certificate of incorporation it is not required to receive a certificate of commencement of business. A public limited company must receive both a certificate of incorporation and a certificate of commencement of business to start business activities.
  5. A private company needs to have only two directors as against the minimum of three directors in the case of a public company. However, the maximum number of directors for both types of companies is fifteen.
  6. A private company is not required to keep an index of members while the same is necessary in the case of a public company.
  7. The minimum number of members required to form a public company is 7, while it is only 2 for a private company.
  8. Directors need not file their consent to act as directors this implies that lesser documentation is required in the case of a private company.
  9. Directors can be permanent. They need not retire in rotation. However, in the case of a public company, 2/3rd of the total number of directors need to retire in rotation.
  10. Need not answer to shareholders. They do not seek to maximize profits for shareholders. They are also not legally bound to publish disclosure requirements. On the other hand, a public company is answerable to its shareholders, as shareholders are the owners and are bound by the law to publish disclosure requirements to the public as they tap financial markets to raise funds.

Limitations

  1. A private company cannot invite the public to subscribe to its shares.
  2. It is restricted from transferring its shares freely.
  3. Due to the above reasons, a private company may face financial constraints and problems in expansion and diversification.
  4. The public is reluctant to confide in private companies as they are not legally bound to publish their reports and other information.
  5. The value of the investment will not be known to shareholders, as shares are not listed on any stock exchange.
  6. Limit the maximum number of shareholders.

Types of Private companies

  1. Private company limited by shares- In this type of company, the liability of the members is limited concerning the amount unpaid by them.
  2. The private company with unlimited liability- In this type of company, the liability of the members is unlimited. This implies, that the assets of the members may be used to retrieve any debts payable to creditors by the company.
  3. Private company limited y guarantee-In this type of a company, the liability of members is limited to the amount of money that they guarantee to pay in case of winding up of the company.
  4. One-person company-This type of company has only one individual as its member. Further, there will be only one shareholder.

What is a Public Company?

A public company means a company that is not a private company.

As per The Companies Act, a public company is one that:

  1. Has a minimum of 7 members and no limit on maximum members.
  2. Has no restriction on transfer securities.
  3. Is not prohibited from inviting the public to subscribe to its securities.

However, a private company that is a subsidiary of a public company is also treated as a public company.

Features

  1. Shareholders- The capital of public companies is divided into smaller units called shares which are owned by individuals called shareholders.
  2. Easy transferability of shares- Public companies are not restricted from transferring shares from one person to another.
  3. Corporate leadership- Management of public companies is usually done by top management (CEO, Managing director, etc), middle management (general manager and deputy general manager), and operational level management(supervisors).

Merits

  1. Public confidence- The public confides in public companies as all necessary information about the company is legally bound to be disclosed to the public before the Initial public offering.
  2. Access to more capital and resources- Since a public company can raise resources from the public, they have access to capital markets and can raise more resources. Hence, there are lesser chances of them facing a financial crisis during expansion and diversification.
  3. Ease in the transfer of shares- There is no restriction on the transfer of shares in a public company.

Limitations

  1. Regulatory requirements- The formation, operation, and closure of a public company involves a lot of paperwork relating to the legal framework.
  2. Appointment of professionals- Professionals like underwriters, auditors, brokers, etc need to be appointed.
  3. Minimum paid-up capital- Minimum paid-up capital for a public company is 5 lakhs. This implies that the initial cost of setting up is very high.
  4. Directors must file their consent to act as directors. This must be done within thirty days of the appointment of the registrar.
  5. Directors must retire in rotation.
  6. Public companies are answerable to their shareholders and seek to maximize profits for them. They are also legally bound to file disclosure requirements.

Main Differences Between Public Company and Private Company in Points

  1. A public company must issue a prospectus while a private company is not required to issue a prospectus as it does not invite the public to subscribe to its shares.
  2. A public company can freely transfer shares as compared to a private company.
  3. A public company requires a certificate of incorporation and certificate of commencement to start business activities while a private company does not require a certificate of commencement to start the business.
  4. Shares of a public company are listed on the stock exchange while shares of a private company are not listed on any stock exchange.
  5. The minimum number of members to start a public company is 7 while it is only 2 for a private company.
  6. A private company has simplified procedures for all legal work while the procedures that a public company must follow are both time-consuming and expensive due to various mandatory and non-mandatory expenses on account of the issue of securities.
  7. A public limited company doesn't need to have articles of the association while a private company must maintain the same.
  8. A one-person company is a private company, not a public company as it avails all benefits of a private company like perpetual succession, no issue of prospectus, simplified procedures, etc.
  9. In a private company, a statutory meeting of members is not compulsory. However, it is mandatory to have a statutory meeting in the case of a public limited company.
  10. In a public company, at least 5 members must be present personally at the Annual general meeting (AGM) for the formation of the requisite quorum. On the other hand, in the private limited company minimum number of members to be present in the annual general meeting is only 2.
  11.  A public company cannot allot shares unless it receives a minimum amount of subscription while a private company can allot shares without receiving a minimum subscription.

Conclusion

This article has presented a comparison between both types of companies, and both have their own merits and limitations. A private company is restricted from issuing its shares to the public and a public company can raise capital from the public by issuing its securities. Ease in transferability of shares is there in a public company. A public company is also not legally bound to maintain articles of association. A private company can be transformed into a public company by offering an Initial public offering. The annual general meeting can be held anywhere in the case of a private company while it must be held in the registered location for a public company.

The selection of an appropriate form of company can be made after considering various factors. Initial costs, liability, continuity, capital considerations, managerial ability, degree of control, and nature of business are the key factors that need to be considered while deciding about the suitable form of a company for one's business.

References

  1. Class 12 NCERT business studies textbook.
  2. www.topperlearning.com
  3. www.masterclass.com
  4. www.educba.com

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"Difference Between Public and Private Company." Diffzy.com, 2022. Sun. 25 Sep. 2022. <https://www.diffzy.com/article/difference-between-public-and-private-company-543>.



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