What is a Company
A company is a distinct legal entity separate from its owners. It can conduct business, own assets, and assume liabilities. Formed and governed by the laws of its incorporation jurisdiction, a company can be owned by individuals or other entities.
Definition and Ownership
Private Company: A private company, governed by the Companies Act 2013, is a joint stock company formed by two or more members with a minimum paid-up capital of ₹1,00,000.
It is also a privately held company owned by a small group of investors. These investors could be founders, family members, or private equity investors. Private company shares are not traded publicly, which means they are not available for sale on any stock exchange. This structure allows the owners to maintain greater control over the company.
Public Company: According to Section 2(71) of the Companies Act 2013, a public company is a joint stock company that is not private. It must have a minimum paid-up capital of ₹5,00,000 and requires at least 7 members to be formed.
A public company offers its shares to the general public through stock exchanges. This means anyone can buy company shares, making it possible for a public company to have thousands or even millions of shareholders. Public companies must adhere to stringent regulatory standards and disclose significant information to protect investors.
Implications:
- Control: Private companies offer founders and key stakeholders greater control over the company’s direction.
- Transparency: Public companies operate under stricter regulations and disclosure requirements, making them more transparent.
- Liquidity: Shares in private companies are generally illiquid, meaning they can be difficult to sell quickly. Publicly traded shares offer greater liquidity, allowing investors to buy and sell them on the stock exchange.
Access to Capital
Capital acquisition is a critical element for business growth. Here’s how private and public companies differ in this aspect:
- Private Companies primarily rely on funding from venture capitalists, angel investors, bank loans, or the founders’ personal savings. This funding often includes specific terms and conditions, such as board representation or influence over strategic decisions.
- Public Companies: Public companies have access to a much larger pool of capital through the stock market. They can issue new shares (equity financing) or sell bonds (debt financing) to raise funds for expansion, acquisitions, or research and development.
Implications:
- Growth Potential: Public companies can raise significant capital quickly, potentially fueling faster growt
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- Investor Expectations: Public companies face pressure from shareholders to deliver consistent growth and profitability, influencing decision-making.
Differences between a Private Company vs Public Company
In the discussion of Private Company vs. Public Company, it is crucial to understand that each type of company has distinct characteristics, benefits, and challenges that can significantly impact the business’s operations, growth potential, and regulatory obligations. Understanding the difference between a public limited company and a private limited company is essential for entrepreneurs, investors, and stakeholders.
Let’s explore some additional differences between publicly traded companies vs private companies:
Category | Public Limited Company | Private Limited Company |
Meaning | A joint stock company not private, with shares listed on a stock exchange. | A closely held company, shares not listed or traded publicly. |
Number of Members | Minimum 7 members, no maximum limit. | Minimum 2 members, maximum 200 members |
Paid Capital | Minimum ₹5,00,000. | Minimum ₹1,00,000. |
Share Transferability | Shares can be traded in the open market. | Shares cannot be listed or traded publicly. |
Prospectus Issuance | Must issue and file a prospectus. | Cannot issue a prospectus; a statement in lieu is issued. |
Public Subscription | Can accept public subscriptions and issue shares/debentures. | Cannot accept public subscriptions or issue shares/debentures publicly. |
Allotment subject to minimum subscription | Restricted to allot shares until minimum subscription is met. | No such restrictions; free to allot shares as per articles of association. |
Directors | Minimum 3 directors. | Minimum 2 directors. |
Appointment of Directors | Two-third of directors must retire by rotation, with one-third retiring each year. | No mandatory retirement by rotation. |
Retirement of Directors | Up to 1000 members: 5 members for quorum;1001-5000 members: 15 members for a quorum; More than 5000 members: 30 members for a quorum. | Minimum 2 members for quorum. |
Quorum | Must be held at the registered office or within the city of the registered office. | Can be held anywhere. |
Meeting | Mandatory as per Section 165 of the Companies Act, 2013. | Not required to hold statutory meetings. |
AGM | Must be held at the registered office or within the city of the registered office. | Can be held anywhere. |
Both Public and private come with their own set of advantages and disadvantages.
Public Company:
- Advantages:
- Easy access to capital: Publicly traded stocks allow for raising vast sums for growth.
- Increased brand recognition: Listing on the stock exchange boosts public image and attracts customers.
- Attracting talent: Stock options incentivize high-caliber employees.
- Disadvantages:
- Increased scrutiny: Public reporting and investor pressure can be demanding.
- Focus on short-term gains: Pressure to meet quarterly targets may hinder long-term vision.
- Complex regulations: Public companies face stricter compliance requirements.
Private Company:
- Advantages:
- Owner control: Founders maintain decision-making power and strategic direction.
- Operational flexibility: Less regulation allows for quicker adaptation and innovation.
- Privacy: Financial information remains confidential, shielding strategies from competitors.
- Disadvantages:
- Limited capital access: Raising large funds relies on personal savings, loans, or a smaller investor pool.
- Lower brand awareness: Reaching a broad audience can be more challenging.
- Attracting talent: Competitive salaries and benefits might be needed to offset the lack of stock options.
Choosing the Right Path for Your Business
The decision between choosing between a private company vs public company hinges on several factors specific to your business goals and risk tolerance:
- Growth Strategy: A public company structure might be more suitable if you envision rapid growth and require substantial capital.
- Control & Transparency: A private company might be a better fit if maintaining control and operating with less public scrutiny are priorities.
- Risk Tolerance: Public companies face greater market scrutiny and pressure from shareholders, which can be a risk factor for some businesses.
While navigating the world of private company vs public company, understanding the key differences between the two is important. Moreover, knowing the answers to what are international markets, broadens horizons, offering diverse investment avenues. By weighing these factors against their business objectives, stakeholders can make informed decisions, ensuring alignment with their financial goals and market dynamics.
FAQ
Is it better to be a private or public company?Deciding between a private company and a public company hinges on priorities. Private firms prioritize independence and privacy, focusing on long-term strategies. In contrast, public firms can access funds more readily, facilitating faster growth. The decision factors in growth plans, financial requirements, and management preferences, ensuring the company’s structure aligns with its business goals and stakeholder interests. Additionally, exploring options company spin- off can present unique strategic opportunities for enhancing shareholder value and operational focus.
What is the difference between private public and one person company?
Private companies are owned by a select group of individuals or entities and are not traded on public stock exchanges. Public companies sell shares to the public, subject to regulatory requirements and shareholder scrutiny. One Person Company (OPC) is a type of private company allowing a single individual to own and manage the business, providing limited liability while maintaining a separate legal identity.
What is the difference between a public company and a listed company?
A public company offers shares for purchase by the public and trades on a stock exchange, adhering to regulations and facing scrutiny from shareholders. In contrast, a listed company specifically has its shares traded on a recognized exchange, offering liquidity and visibility to investors. While equity market guidance and investment suggestions are crucial for investors. , spinning off a company strategically can unlock distinct opportunities.
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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.