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Difference between Private and Public Company

Difference between Private and Public Company

Difference between Private and Public Company

In the business world, two main types of companies exist: private company and public company. These two structures shape how businesses function and relate to the world around them. Understanding the differences between private and public companies is essential whether you are an aspiring entrepreneur or just curious about the business world. In this article, we will break down these Differences between Private and Public Companies, helping you make informed decisions. If you’re considering starting your own business and need assistance with company registration, don’t forget to check out IndiaFilings, your one-stop destination for all your registration needs.

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Public Company

As defined by the Companies Act 2013, a public company invites the general public to subscribe to its share capital to raise funds. This solicitation is facilitated by issuing a prospectus, followed by the allotment of shares. Public companies allow their shareholders to transfer their shares without stringent restrictions. These companies typically list their shares on stock exchanges, where all trading activities are conducted with the assistance of brokers. Key characteristics of a public company encompass:

  • Minimum and Maximum Members: A public company must have at least 7 members, with no maximum limit specified.
  • Minimum Paid-up Capital: It is mandated to have a minimum paid-up capital of 5 lakhs.
  • Subsidiary Status: Any private company that operates as a subsidiary of a public company is also categorized as a public company.  
  • Name Suffix: Under the Companies Act 2013, every public company must append the suffix “Ltd.” to its name.
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Private Company

In contrast to public companies, private companies do not offer their securities to the general public for subscription via stock exchanges; instead, such transactions occur privately or over the counter. These companies may impose restrictions on their members’ ability to transfer shares. Notably, a private company can transition into a public company later in its existence, providing access to a broader range of funding opportunities. When a private entity makes this transition, all privately held securities become publicly owned and can be listed on a stock exchange. Key characteristics of a private company encompass:

  • Minimum and Maximum Members: A private company must have a minimum of 2 members and a maximum of 200 members.
  • Minimum Paid-up Capital: Maintaining a minimum paid-up capital of 1 lakh is required.
  • Subscription to Deposits: Private companies do not solicit the general public for deposits.
  • Name Suffix: According to the Companies Act 2013, every private company must include the suffix “Pvt. Ltd.” in its registered name. For example, a private company named ABC must use the suffix “ABC Pvt. Ltd.” to denote its status.

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Difference between Private and Public Company

Let’s explore the distinctions between a public company and a private company, examining each aspect individually:

Ownership and Shareholders

One of the fundamental distinctions between a Public Company and a Private Limited Company is the ownership structure:

  • Public Company: Public companies are owned by a diverse group of shareholders, which can include members of the general public. Shares of public companies are traded on stock exchanges, allowing anyone to buy and sell them.
  • Private Limited Company: Private Limited Companies, on the other hand, have a more restricted ownership base. Typically, they are owned by a smaller group of individuals, often including the company founders. The ownership is not open to the public, and shares are not traded on public stock exchanges.

Minimum Members

Public and Private Limited Companies also differ in their minimum membership requirements.

  • Public Company: A minimum of seven shareholders is usually required to register as a Public Company, though this number may vary by jurisdiction.
  • Private Limited Company: Private Limited Companies typically require at least two shareholders, making them a viable option for smaller businesses with a limited ownership group.

Minimum Capital Requirement

The minimum capital requirement is another area where these two structures vary:

  • Public Company: Public companies often have specific minimum paid-up capital requirements, which can be substantial.
  • Private Limited Company: In contrast, many jurisdictions do not impose a minimum capital requirement for Private Limited Companies, providing more flexibility for startups and small businesses.

Regulatory Compliance

Public and Private Limited Companies face differing levels of regulatory compliance:

  • Public Company: Public companies are subject to rigorous regulatory requirements. They must adhere to strict financial disclosure and reporting standards, including publishing annual reports that provide detailed financial information to the public.
  • Private Limited Company: Private Limited Companies typically have fewer regulatory obligations. They enjoy greater privacy in their operations and may not be required to disclose financial details publicly.

Share Transferability

The ease of transferring shares is a critical distinction:

  • Public Company: Public company shares can be freely traded on stock exchanges, providing liquidity to investors. Shareholders have the flexibility to buy and sell their shares in the open market.
  • Private Limited Company: Share transfer in a Private Limited Company is often restricted. It may require approval from existing shareholders, making it less liquid and limiting the ability to easily change ownership.

Access to Capital

Both structures offer different avenues for raising capital:

  • Public Company: Public companies can raise substantial capital by selling shares to the public. This ability to access the broader market can be advantageous for larger-scale projects.
  • Private Limited Company: Private Limited Companies typically rely on a smaller group of investors and lenders for capital. While they may have access to funding, it is often on a smaller scale compared to public companies.

Management and Control

Management and decision-making processes also differ:

  • Public Company: In a public company, management decisions are often subject to approval by the board of directors and shareholders, given the broader ownership base.
  • Private Limited Company: Private Limited Companies may afford founders or a select group of shareholders greater control over decision-making.

Disclosure and Transparency

Levels of disclosure and transparency vary:

  • Public Company: Public companies are required to maintain high levels of transparency. They must disclose extensive financial information and are subject to public scrutiny.
  • Private Limited Company: Private Limited Companies often have more privacy. They may not be required to disclose financial details publicly, offering a degree of confidentiality.

Listing on Stock Exchange:

The option to list on a stock exchange is unique to public companies:

  • Public Company: Public company shares can be listed and traded on stock exchanges, providing visibility and access to a wide range of investors.
  • Private Limited Company: Private Limited Companies do not have the option to list their shares on public stock exchanges.

Exit Strategy

Finally, the choice between public and private structures can impact exit strategies:

  • Public Company: Public companies provide a clear exit strategy for investors by selling publicly traded shares, offering liquidity and flexibility.
  • Private Limited Company: Exit options for Private Limited Companies may be more limited. Decisions often require agreement among shareholders, and liquidity can be more challenging to achieve.

In conclusion, the decision between a Public Company and a Private Limited Company is a significant one that should align with the specific goals, needs, and circumstances of a business. Both structures have advantages and disadvantages, and entrepreneurs should carefully consider factors such as ownership, regulatory compliance, access to capital, and long-term objectives when making this critical choice. The right decision can ultimately pave the way for business success and growth.

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Here’s a tabular format highlighting the key differences between private and public companies:

Points of Difference between Public Company and Private Company

Public Company

Private Company

Definition A public company can sell its registered shares to the general public. A private company can sell its own privately held shares to a few willing investors.
Traded on The stocks of a public company are traded on stock exchanges. The stocks of a private company are owned and traded by only a few private investors.
Regulations A public company must adhere to many regulations and reporting standards per the SEC. Until private companies reach $10 million in assets and have more than 500 shareholders, they do not have to follow certain SEC-issued regulations.
Advantage The primary advantage of a publicly-traded company is that it can tap into the market by selling more shares. The primary advantage of a privately-traded company is that it does not need to answer to any stockholders, and there is no need for public disclosures.
Size Publicly-traded companies are often perceived as larger corporations. Privately-traded companies can also be significant in size; the notion that privately held companies are always smaller is not accurate.
Source of Funds Publicly-traded companies raise funds by selling shares and bonds to the public. Privately-traded companies typically obtain funding from a select group of private investors or venture capitalists.
Access to Capital (Additional Point) Public companies have greater access to capital through public offerings and the ability to issue more shares. Private companies have limited access to capital and rely on private investors, loans, or venture capital for funding.
Ownership (Additional Point) Ownership in public companies is distributed among a wide range of public shareholders. Ownership in private companies is usually concentrated among a smaller group of founders, investors, or private individuals.
Disclosure Requirements (Additional Point) Public companies are subject to extensive financial disclosure requirements, making their financial information accessible to the public. Private companies have fewer disclosure requirements and can keep financial information confidential, sharing it primarily with shareholders and creditors.

Can a private company be a public company shortly, or vice versa?

Conversion from Private to Public:

A private company can evolve into a public company through a definitive process known as an initial public offering (IPO). The company issues shares to the broader public through an IPO, allowing individuals to become shareholders.

Transformation from Public to Private:

Conversely, a public company can transform a private company. In certain instances, a public company may desire a more limited ownership structure, typically involving a select group of investors. To achieve this shift, the company may enlist the assistance of a Private Equity (PE) firm. The PE firm acquires a significant portion of the company’s outstanding shares, thereby gaining substantial control. Following this acquisition, the company can formally petition regulatory bodies, such as the SEC, to remove its listing from the stock exchange, effectively reverting to private status.