Difference Between Public and Private Company

Difference Between Public and Private Company

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Feb 9, 2024 17:10 IST

Companies can be public and private in nature. While public companies issue its shares to the public, private company limit it to only certain shareholders. In terms of the market cap and influence, public companies are much bigger in size.

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We will be discussing the difference between public and private company in this article. There will be focus on these two types of companies individually over the course of this article. 

Table of Contents

  1. Difference between public and private company
  2. What is a public company?
  3. What is a private company?

Difference between Public and Private Company

The main difference between the two is the way in which these two deal with public closure. Following are the difference between public and private company:

Parameter Public Private
Disclosure of Information Mandatory (financial statements to public) Not mandatoty
Shares Traded on stock exchange Cannot be traded on stock exchange
Suffix Limited Private Limited
Minimum directors 3 2
Registration Documents Certification of Incorporation and Commencement of Business Certification of Incorporation
Public issue of shares Allowed Not allowed
AGM 5 members members must be present 2 members must be present
Prospectus Issue Mandatory  Not mandatory
Maximum members Unlimited 200

What is a Public company?

A public company or publicly traded company is a corporation where shareholders can claim the company’s assets and profits. These traders gain ownership through free trade of shares on the stock exchange. The ownership of such companies is organised via shares of stocks that are either freely traded in a stock exchange or in over-the-counter markets. In some countries, it is mandatory for a company of a certain size to list in the exchange. For others, listing on the stock exchange is optional. A public company must fulfill the following criteria:

  • Minimum seven shareholder
  • At least 5 lakh rupees of share capital
  • Minimum three directors 
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Characteristics

Following are the characteristics of a public company:

  1. Paid-up capital: A minimum amount of paid capital is required for setting up a public company.
  2. Suffix: A public company must use ‘Limited’ after its name.
  3. Prospectus: As per the Act for Public Limited companies, such companies must issue a prospectus. 
  4. Limited liability: The liability of each shareholder in a public company is limited. This means that shareholders of a public limited company are not responsible for a loss that is greater than their invested money. 
  5. Disclosure of information: The company is required to disclose its financial information to the public. 

Advantages

Following are the advantages of public companies:

  1. Public companies raise funds and capitals by issuing their shares or through trading these stocks in the exchange. 
  2. These companies are legally bound to publicly disclose information about their financial status and about the company’s futures. 
  3. Risk is mitigated by sharing their risk. For this, they can sell shares to the public to recover their losses. 
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What is a private company?

A firm with private ownership is known as a private company. These companies do not issue their trade through IPO but they can still issue stocks and have shareholders. It is difficult to determine their valuation. Private companies are of four types. These include limited liability corporations (LLCs), sole proprietorships, S corporations (S-corps) and C corporations (C-corps).

Its stocks are offered privately to some of its shareholders. These companies do not have access to the public exchange market  due to which they can raise funds through company profits, loans from lenders and private investments. These companies are formed by only a limited number of shareholders for a profit or social motive.  Many companies choose to stay private due to the following reasons:

  • Many companies choose to stay private to avoid regulatory scrutiny.
  • To retain their family ownership, a number of companies remain private since they do not have to give shares to the public which prevent outside intervention.

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Characteristics

Following are the characteristics of a private company:

  • Members: A private company must have at least a minimum two members and maximum of two hundred members.
  • Directors: Private companies should have at least two directors and maximum 15 directors. 
  • Perpetual succession: As per the law, the company will continue to exist forever even if goes bankrupt 
  • Limited liability: Similar to public companies, these companies have limited liabilities. This means that the shareholders will not be liable to sell off their personal assistance for payments.
  • Suffix: These companies have to use ‘private company’ at the end of the name. 
  • Separate entity: It is a different legal entity that is seperate from its directors and shareholders.

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Advantages

There are many advantages of private companies:

  1. Tax efficient: These companies can claim corporation tax relief on their profits. When private companies pay dividends to its shareholders, they are taxed at a lower rate. 
  2. Ease of raising capital: Due to their credibility, they can easily raise capital by issuing bonds, shares and by taking out loans.  
  3. Complete ownership: Owners gain complete control within a small group for managing a business which allows complete ownership. 
  4. Protection from creditors: Due to limitation of disallowing creditors from seeking direct payment from owner’s personal assets. This limits the liability of shareholders and directors thus ultimately offering them protection. 

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FAQs

What are the main differences between public company and private company?

Minimum number of directors is 5 for public and 2 for private companies. Prospectus issue is not mandatory for private companies whereas it is mandatory for public companies. Public company must disclose its financial statement to the public whereas it is not compulsory for private companies.

What is the other name for a public company?

A public company is also known as a publicly traded company. Shareholders have a share in the assets and profit of the company.

Why do companies issue IPO?

Companies issue IPO for raising capital for paying off debts, raising capital, and diversifying their holdings.

Are private companies allowed to issue shares?

Private companies can issue stocks but they will neither be traded on public exchanges and will also be not issues via an IPO.

About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio