Public Company Vs. Private Company

What is a Public and a Private Company?

A company is a legal entity that is formed by an association of people for the conduct of business activities to make profits. The two main types of companies are public limited companies and private limited companies. A public limited company is a company that is listed on a recognized stock exchange of a country, and its shares can be bought or sold by the general public. It means that the shareholders are the owners of the company and have a proportionate claim to the assets and profits of the company.

On the other hand, a private company is not listed on any stock exchange, and hence, its shares are not traded publically. A small group of people generally hold their shares. They make the bulk of the contribution to the company’s capital. Also, the rewards in the form of profits are shared within the group only.

Differences between Public vs. Private Company

The main differences between the two types of companies are:

The minimum paid-up capital requirements of a Public company is higher than that of a private company. Moreover, a private limited company can have only a limited number of members. But there is no such upper limit on the number of members in a public company.

Issue of Prospectus and Transferability of Shares

A Private Company cannot issue a prospectus with inviting the general public to subscribe to its shares. Share transfers are not so easy in a private company.

A Public company issues a prospectus to invite the general public for the subscription of its shares. They are then free to transfer the shares anytime as per their choice and will.

Public Disclosure and Scrutiny

A public company with shares trading on a recognized stock exchange mandatorily needs to file its earnings reports with the financial regulatory board of the respective country. It may be monthly, quarterly, or as required by the regulatory board. Also, public companies go through intense scrutiny of the public, investment analysts, and even the press. And all these people can attend its Annual General Meetings.

A private company need not disclose its earnings reports to outside parties as they do not trade on any stock exchange. Also, they are free from the scrutiny of the press or the general public.

Funding

A Public Company has to make an offer to the existing shareholders for purchasing its shares, in case it decides to raise more capital by fresh issue of shares. Such an issue is called a rights issue. A private company may not compulsorily need to offer any new issue of shares to its existing members. Moreover, a private company may take the help of private investors or venture capitalists to fulfill its additional capital requirements. However, they may face a scarcity of funds as they have limited resources at their disposal for raising further funds.

Appointment and Requirements for Directors

In the case of a public company, a minimum of three directors are essential, and they have to go through several formalities. They have to file a consent to act as a director with the registrar. Also, they are ineligible to vote or take an active part in any discussions with regards to a contract in which they have any interest. Two-thirds of the directors of such companies need to retire by rotation every year.

All such restrictions are not there for the directors of a private company. Also, the minimum number of directors for their functioning is two.

Public Company vs Private Company

Motive

The main motive of a private company is to make profits. Thus, their interest is only in those economic activities that provide excellent and steady return prospects.

The ultimate motive in the case of public companies also remains to earn profits and maximize the shareholder’s wealth.  However, since they have to face public scrutiny, they may work for socio-economic causes along with profit-making objectives.

Autonomy of Management

Management of a public company is very rigid and inflexible as they have to abide by the rules, regulations, and policies of the government. There are red-tapism and delays in decision making, sometimes. It may result in a loss of business.

On the other hand, private companies are managed by the owners themselves or managers elected by them. The elected representatives are answerable only to a very few people and have little rules and regulations to follow. Hence, decision-making and implementation are swift. Also, private companies reward innovative practices and ideas which act as a booster.

Conversion between the Public and private company

The main motive for the conversion of a private company into a public company is the need for more capital or funds in most of the cases. A business needs funds to expand its production, market, and make more investment into fixed capital as well as human resources. A shortage of money may hinder growth as private companies have limited avenues for raising capital. Therefore, a private company can opt to go public. After conversion as a Public company, it can conduct an Initial public offering (IPO) and raise funds from the general public by way of issue of shares.

A public company can also convert into a private company, but the process is much more complicated. It is so because suddenly, it will do away with all the public disclosures and scrutiny. Such companies can hire an appropriate PE firm that can buy most of the outstanding shares of the company. The PE firm will then have to ask the regulatory body of the country to delist the company from the stock exchange.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

Leave a Comment