There are many types of companies, but mainly private limited and public limited are the types of company. The public company means those companies traded publicly in terms of security and recognized stock exchange. The private limited company is the one that is not listed in the stock exchange, and its security is held by its members of the organisation privately. Before knowing about entrepreneurship, it is essential to know about the types and best suitable kind to start a business.
A private company is a company held in private hands. This means that, in most cases, a company is owned by its founders, management, and/or a group of private investors. The public isn’t privy to its business.
A public company is a company that has sold a portion of itself to the public via an initial public offering (IPO), meaning shareholders have a claim to part of the company’s assets and profits.1 Public disclosure of business and financial activities and performance is required of public companies.
Both private and public companies can contribute to the financial health and well-being of economies and nations through their business activities, employment opportunities, and wealth building.
Public limited company
According to the Companies’ Act 2013, a public limited company is not private. This means a public limited company is a joint-stock company governed by the provision of the Indian Companies’ Act 2013. There is no limit to the number of members, and it is formed by an association where people are voluntarily paid up to five lakhs rupees capital. There is no restriction in transferability, and in time of incorporation, the term public limited is added to its name. A public limited company offers shares to the public. It is more open to the public about its details and also listed in the stock market.
Private limited company
According to the Companies’ Act 2013, private companies are restricted from transferring their share. In simple words, a private limited company is a joint-stock company governed under the Indian Companies’ Act 2013. It has limitations in the number of members. Still, the voluntary association of the company should be paid a minimum of 1 lakh rupees capital. The maximum number of members should be 200, and it does not include current or ex-employees who are not listed in the employment term. Employees are allowed to continue as a member after the termination of employment in the company. There is a restriction in transferring the shares. The term private limited is used in the name of the company.
Difference between Private and Public Company
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.
FAQs
Can a Public Company Become Private?
Yes, as long as a shareholder vote supports such an action. Normally, the company has to buy back (or already own) enough of its shares to control the voting for this move.
Which Is More Transparent, a Private or Public Company?
Both can be transparent about what they do, their financial performance, and business results. However, a public company is required to provide a wealth of information about itself to the SEC, and in turn, the public-at-large, on a regular basis. A private company need only be transparent to its private owners.