Difference Between Public and Private Company

Introduction

A joint-stock company is defined as 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 with a separate legal entity, perpetual succession, and a common seal. The Companies Act, 2013, governs the corporation form of organization. According to 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, and the Board of Directors is considered the chief managing body elected by the shareholders. Usually, the owners exercise indirect control over the business. The enterprise's capital is divided into several smaller units called shares.

A company can be either a private corporation or a public corporation. A public company is a corporation 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 or a portion of its stake to the public.

Public Company vs Private Company

The critical 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. In contrast, 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 mandated 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

• A public company must issue a prospectus while a private company is not required to issue a prospectus. This is because it does not invite the public to subscribe to its shares.
• A public company can freely transfer shares as compared to a private company.
• A public company requires a certificate of incorporation as well as a certificate of commencement of business to start business activities while a private company does not require a certificate of commencement to start the business.
• Shares of a public company are listed on the stock exchange while shares of a private company are not listed on stock exchanges.
• The minimum number of members to start a public company is 7 while it is only 2 for a private company.
• 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.
• A public limited company doesn't need to have articles of the association while a private company must maintain the same.
• 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.
• 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.
• 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.
•  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.

Parameters of Comparison	Public Company	Private Company
Definition	A public company is defined as a company that is allowed to raise funds by inviting the public to subscribe to its securities.	A private company is a corporation 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 laid down on the transfer of securities 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 its shares	Can invite public to subscribe to its share and debentures	Cannot invite the public to subscribe to its securities.
Commencement of business	A public company is allowed to 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 rights of its members to transfer their shares and securities from one individual to another.
2. Has a minimum of two members and a maximum of two hundred members, excluding the present and past employees.
3. Does not invite the general public to subscribe to its shares and other securities.

A private company is legally bound to use the word private limited after its name. If a private corporation contradicts any of the above provisions, it ceases to be a private company and loses all the privileges that it enjoys when compared to a public company.

Privileges that a private company enjoys that a public company does not are:

1. The minimum number of members that are required to form a private company is only two. On the other hand, seven members are needed to form a public company.
2. A private company is not required to issue a prospectus as it does not invite the public to subscribe to its shares.
3. A private company is allowed to allot its shares without receiving minimum subscription.
4. A private limited company is permitted to start its business activities as soon as it receives the certificate of incorporation. However, a public limited company should receive both a certificate of incorporation and certificate of commencement of business to start its business-related activities.
5. A private company is required to have a minimum number of two directors. However, it is mandatory for a public company to have a minimum of three directors. On the other hand, the maximum number of directors for both the types of companies is fifteen.
6. It is not necessary for a private company to keep an index of its members while the same is compulsory for a public company.
7. Directors are not legally bound to file their consent to act as directors in a private company. This implies that lesser documentation is required in the case of a private company.
8. Directors can be permanent in a private company. They need not mandated to retire in rotation. However, in a public company, 2/3^rd of the total number of directors need to retire in rotation.
9. A private company is not bound to answer to its shareholders. They do not seek to maximize profits for shareholders. They are also not legally bound to publish their documents. To the contrary, a public company is answerable to its shareholders, as shareholders are the owners and are bound by the law to publish necessary documents 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 only to the amount of money that they guarantee to pay on the event 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.

According to The Companies Act, a public company is a company that:

1. Has a minimum of 7 members and has no limit on the maximum members.
2. Has no restriction on transfer securities.
3. Is permitted to invite 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 are mandated to file their consent to act as directors. This should 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. They 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

• A public company must issue a prospectus while a private company is not required to issue a prospectus. This is because it does not invite the public to subscribe to its shares.
• A public company can freely transfer shares as compared to a private company.
• A public company requires a certificate of incorporation as well as a certificate of commencement of business to start business activities while a private company does not require a certificate of commencement to start the business.
• Shares of a public company are listed on the stock exchange while shares of a private company are not listed on stock exchanges.
• The minimum number of members to start a public company is 7 while it is only 2 for a private company.
• 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.
• A public limited company doesn't need to have articles of the association while a private company must maintain the same.
• 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.
• 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.
• 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.
•  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 is allowed to 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 (AGM) of the company 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 kept in mind 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