Companies are primarily classified into private and public. We are going to discuss them and how they differ from each other.
The term ‘company’ alludes to the voluntary grouping of people who came together to work toward a common goal. Know about the Differences Between Public Companies and Private Companies in India.
Since the firm and its members are two separate legal entities in the perspective of the law, one should not confuse the two. Additionally, it has a common seal, eternal succession, the ability to sue and be sued, and transferable share capital.
What is a Company?
A company is a legal entity that is created to conduct business activities. It is an organization that is formed by a group of people who come together to achieve a common goal. A company can be owned by individuals, other companies, or even the government. The purpose of a company is to generate profits by providing goods or services to customers.
Private Limited Company – Definition
The private limited company is a joint stock business, to put it simply. It is governed by the Indian Companies Act, 2013. It is created through the voluntary association of individuals with a paid-up capital of at least ₹1,00,000. Although there is a limit of 200 members, that figure does not include any present employees or former employees who were members while they were employed.
Even after leaving the company, employees are still able to remain members. Share transfers are prohibited. It forbids the public from entering through the purchase of shares and debt obligations. After its name, the phrase ‘private limited’ is employed.
Registration Requirements for Private Limited Company
To register a private limited company in India, the following requirements must be met:
- Directors: A minimum of two directors are required, and at least one of them must be an Indian resident.
- Shareholders: A minimum of two shareholders are required.
- Capital: There is no minimum capital requirement.
- Name: The name of the company must be unique and not similar to any existing company name.
Documents Required for Incorporation of Private Limited Company
To incorporate a private limited company in India, the following documents are required:
- PAN card of the proposed directors
- Government ID proof of the proposed directors, such as a passport, voter’s ID, or driver’s license
- Latest bank statement of the proposed directors
- Proof of residence of the proposed directors, such as a bank statement, electricity bill, phone bill, or gas bill
- Passport-sized photograph of the proposed directors
- Specimen signature of the proposed directors (blank document with signature)
- Identity and address proof of the shareholders
- Address proof of the registered office of the company
- MOA (Memorandum of Association) and AOA (Articles of Association)
- DIN (Director Identification Number)
- DSC Registration (Digital Signature Certificate)
- Certificate of Incorporation
PLC or Public Limited Company – Definition
As per the Companies Act, 2013, a public limited company is an organization that offers shares to the general public and has limited liability.
The number of members is unrestricted, but it must be founded by a voluntary association of individuals with a minimum paid-up capital of ₹5,00,000. Shares can be transferred without restriction. The business may issue invitations to the public to subscribe for shares and debentures.
Incorporation Requirements for Public Company
Here are some of the requirements for incorporating a public company in India:
- Directors: A public company must have at least three directors, and at least one of them must be an Indian resident.
- Shareholders: A public company must have at least seven shareholders.
- Authorized capital: A public company must have a minimum capital of INR 5 lakhs.
- Name: The name of the company must be unique and not similar to any existing company name.
Documents Required for Incorporation of Public Limited Company
- Identity proof of the proposed directors (PAN card, passport, voter ID, etc.)
- Address proof of the proposed directors (passport, driving license, Aadhaar card, etc.)
- Proof of registered office address of the company (rent agreement, electricity bill, property tax receipt, etc.)
- MOA and AOA of the company
- Declaration by the proposed directors stating that they are not disqualified to act as directors under the Companies Act, 2013
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Key Differences Between Public Companies and Private Companies
Choosing a business structure is a crucial step for entrepreneurs. Here’s a breakdown of the key differences between public and private companies to help you decide which might be the better fit:
Ownership and Shareholders:
- Public Company: A diverse group of people can own a public company, with shares readily available for purchase on stock exchanges.
- Private Company: Ownership is restricted to a smaller group, typically founders or a select few investors. Shares are not traded publicly.
Number of Shareholders (Minimum):
- Public Company: Usually requires at least seven shareholders, though this may vary.
- Private Company: Needs a minimum of two shareholders, making it suitable for smaller operations.
Minimum Capital Requirement:
- Public Company: Often faces stricter requirements for minimum paid-up capital (starting amount).
- Private Company: Many jurisdictions allow private companies to start with lower or no minimum capital, offering more flexibility.
Regulations:
- Public Company: Subject to stricter regulations and must disclose detailed financial information publicly.
- Private Company: Generally face fewer regulations and enjoys more privacy regarding financial details.
Share Transferability:
- Public Company: Shares are easily transferable on stock exchanges, providing liquidity for investors.
- Private Company: Transferring shares often requires approval from existing shareholders, making it less liquid.
Raising Capital:
- Public Company: Can access significant capital by issuing shares to the public through stock exchanges.
- Private Company: Relies on a smaller pool of investors or lenders for funding, typically on a smaller scale.
Management and Control:
- Public Company: Decision-making often involves board approval and shareholder input due to the broader ownership structure.
- Private Company: Founders or a select group may have more control over company decisions.
Disclosure and Transparency:
- Public Company: Operates with high transparency, requiring extensive financial disclosure for public scrutiny.
- Private Company: Generally enjoys more privacy and may not be obligated to publicly disclose financial details.
Stock Exchange Listing:
- Public Company: Can list shares on stock exchanges for wider visibility and investor access.
- Private Company: Shares cannot be listed on public exchanges.
Exit Strategy:
- Public Company: Investors can easily exit by selling their publicly traded shares.
- Private Company: Exiting may be more challenging and often requires agreement among shareholders, with less liquidity.
A Comparative Analysis of a Public Company vs Private Company
Public companies and private companies are two different types of companies that operate in different ways. Here is a comparative analysis between the two:
Ownership: Public companies are owned by shareholders who can buy and sell shares of the company on a stock exchange. Private companies, on the other hand, are owned by a small group of individuals or a single entity. The company formation draft needs ownership mentioned on it!
Disclosure: Public companies are required to disclose financial information to the public, including quarterly and annual reports. Private companies are not required to disclose this information.
Regulation: Public companies are subject to more regulation than private companies. They must comply with securities laws and regulations, as well as other laws that apply to public companies. Private companies are subject to fewer regulations.
Access to capital: Public companies have easier access to capital than private companies. They can raise money by issuing shares of stock to the public. Private companies must rely on private investors or loans from banks.
Examples of Public and Private Companies
Examples of public companies include Apple Inc., Microsoft Corporation, and Amazon.com Inc. These companies are listed on stock exchanges and have a large number of shareholders.
Examples of private companies include Cargill Inc., Koch Industries Inc., and Mars Inc. These companies are owned by a small group of individuals or a single entity and are not listed on stock exchanges.
FAQs:
1. How do mergers and acquisitions differ for public and private companies?
Mergers and acquisitions differ for public and private companies in India. Public mergers and acquisitions are subject to Indian securities laws, while private mergers and acquisitions are not.
2. Are there distinct tax implications for public and private companies in India?
There are distinct tax implications for public and private companies in India. For example, a private resident company is taxed on its worldwide income, while a public non-resident company is taxed only on income that is received in India, or that accrues or arises, or is deemed to accrue or arise, in India.
3. Are there sector-specific considerations in India for public and private companies?
There are sector-specific considerations in India for public and private companies. For example, in the healthcare sector, public-private partnerships are being used to combine India's public-sector hospitals with the private sector's vast resources, required infrastructure and capabilities.
Conclusion:-
These are the differences between public and private companies. Both public and private limited companies have their own advantages and disadvantages. Based on your requirement you can choose them accordingly. If you aren’t sure of what to pick you can always get expert help from us, Vakilsearch.
