Difference Between Private and Public Company under Companies Act 2013

Companies are often categorised as Private Limited or Public Limited companies, each with its own set of characteristics and regulatory requirements. Understanding the difference between private and public company under Companies Act 2013 is crucial for entrepreneurs, investors and those navigating the complex landscape of corporate governance.

This article aims to delve into the key differences between private and public companies under Companies Act 2013.

What is a Company?

A company is a legal entity that is separate from its owners. It can do business, own things and take on responsibilities. The laws of the place where it’s created control and guide it. People or other entities can own a company.

What is a Private Company?

A private company, like a public limited company, falls under the Companies Act, 2013. According to this Act, a private company, defined in section 2(68), is a joint stock company formed by 2 or more members.

Unlike public companies, private ones can’t list their shares on stock exchanges and their shares can’t be traded publicly. Rules about transferring shares in a private company are strict. The Act states that a private company is a voluntary association of 2 or more people, with a minimum paid-up capital of Rs. 1,00,000.

Also, the maximum number of members is limited to 200, excluding current or ex-employees who remain members. It’s important for a private company to have ‘Private Limited’ in its name.

What is a Public Company?

A public company, according to section 2(71) of the Companies Act, 2013, is basically any joint stock company under the Act that isn’t a private company. Public companies must have a minimum paid-up capital of Rs. 5,00,000 and at least 7 members.

Unlike private companies, there’s no limit on the maximum number of members in a public company. Their shares are listed on stock exchanges and can be traded following SEBI guidelines. Public companies need to include ‘Public Limited’ in their name so everyone knows their nature.

Key Differences Between Private and Public Company under Companies Act 2013

The difference between private and public company under Companies Act 2013 are”

Ownership and Structure

One of the fundamental differences between private and public companies under Companies Act 2013 lies in their ownership and structure. A private company is characterised by a more exclusive ownership structure.

It requires a minimum of two members and can have a maximum of 200 members. In contrast, a public company must have a minimum of seven members and there is no upper limit on the number of members, allowing for a broader ownership base.

Directors and Governance

The composition of directors is another crucial aspect that sets these two types of companies apart. A private company must have a minimum of two directors, with a maximum limit of 15 directors.

On the other hand, a public company necessitates a minimum of three directors, with the same maximum limit of 15 directors. This variance in directorial requirements reflects the scale and complexity of decision-making processes within each company type.

Share Transferability

The ease with which shares can be bought and sold is a notable difference between private and public company under Companies Act 2013. In private companies, shares can be transferred, but this process is subject to certain restrictions.

This limitation is in stark contrast to public companies, where shares are freely transferable. The ability to trade shares openly on stock exchanges is a characteristic feature of public companies, providing liquidity to investors.

Raising Capital from the Public

The ability to raise funds from the public is a significant factor influencing the choice between between private and public company under Companies Act 2013 structures. private companies are restricted in their capacity to raise funds publicly.

They cannot issue a prospectus to the public for fundraising. In contrast, public companies have the advantage of being able to raise capital from the public through the issuance of shares, enabling them to tap into a wider pool of investors.

Regulatory Compliance

The regulatory landscape for private and public companies varies significantly. private companies are not obliged to appoint an independent director, form an audit committee or establish a nomination and remuneration committee.

On the contrary, public companies are mandated by law to have at least two independent directors on their board if they meet certain financial criteria. Additionally, they are required to constitute an audit committee and a nomination and remuneration committee.

Furthermore, public companies are subject to more stringent regulations concerning corporate governance, transparency and accountability due to their widespread ownership structure. Compliance with these regulations is not only a legal requirement but also enhances the credibility and trustworthiness of the company in the eyes of investors and the public.

Appointment of Directors and Key Managerial Personnel

The process of appointing directors and key managerial personnel differs between private and public companies. private companies have more flexibility in appointing two or more directors through a single resolution without stringent restrictions. In contrast, public companies face the requirement that such appointments must be agreed upon by all members at a general meeting.

Moreover, the appointment of key managerial personnel, such as the managing director, company secretary and chief financial officer, is not compulsory for private companies. However, a private company with a paid-up share capital of Rs. 10 crores or more is required to have a whole-time company secretary.

In contrast, public companies with a paid-up share capital of Rs. 10 crores or more are obligated to appoint key managerial personnel, emphasising the need for specialised roles in larger, publicly traded entities.

Quorum for General Meetings

The quorum for general meetings is another aspect where there is a difference between private and public company under Companies Act 2013. In private companies, a quorum is formed by the presence of two members. In contrast, the quorum for public companies is contingent upon the total number of members.

For instance, if the total number of members is less than or equal to 1000, the quorum is set at 5 members. As the total number of members increases, the quorum requirements also escalate, with different thresholds for companies with 1000 to 5000 members and those exceeding 5000 members.

Rotation of Directors

The concept of rotating directors is specific to public companies. According to regulations, two-thirds of the total number of directors in a public company are liable to be retired by rotation every year.

This mechanism ensures a periodic refreshment of the board, bringing in new perspectives and preventing stagnation in the decision-making process. In contrast, the provisions of rotation of directors are not applicable to private companies, allowing for a more stable board structure.

Use of Suffix and Managerial Remuneration

The names of private and public companies are distinguished by the suffix used. private companies are required to use the suffix ‘Private Limited’ in their names, while public companies must use ‘Limited.’ This naming convention reflects the nature of their corporate structure and serves as a clear identifier for stakeholders.

Regarding managerial remuneration there is a difference between private and public companies under Companies Act 2013, private companies do not face specific restrictions on the remuneration paid to their managing director, manager or whole-time director. In contrast, public companies are subject to regulations limiting the overall remuneration paid to these roles to 11% of the net profits of the company in a particular financial year. This restriction aims to ensure fairness and prevent excessive remuneration in publicly accountable entities.

Here is a table summarising the difference between private and public company under Companies Act 2013:

Public Limited vs Private Limited Company: Which is Better?

Choosing between a Public Limited Company and a Private Limited Company is a significant decision that depends on various factors. Each type of company has its own set of advantages and disadvantages, making them suitable for different business scenarios. To make an informed decision, one must consider several key points:

Scale of Business

Private Limited Company: Suited for small-scale businesses with lower capital requirements and a smaller management team.

Public Limited Company: Ideal for larger businesses involving substantial capital, extensive machinery use and a larger workforce.

Compliance Requirements

Private Limited Company: In India, private companies generally face lower compliance requirements compared to their public counterparts. This results in lower compliance costs for private companies.

Public Limited Company: Public companies, due to their wider ownership and market exposure, are subject to more stringent compliance regulations, leading to higher compliance costs.

Expansion Opportunities

Private Limited Company: Limited chances of expansion as private companies cannot raise funds from the public. Expansion is typically funded through private investments or loans.

Public Limited Company: Offers endless opportunities for expansion as they can list their shares on stock exchanges, allowing them to raise funds from the public. This provides a substantial financial advantage for growth and development.

Brand Recognition

Private Limited Company: May face challenges in terms of brand recognition, as they operate on a smaller scale and often within a specific niche.

Public Limited Company: Enjoys easier brand recognition due to the widespread visibility associated with being listed on the stock exchange. This can enhance the company’s reputation and attract more attention from investors and consumers.

Conclusion

The difference between private and public company under the Companies Act 2013 extend across various facets, including ownership structure, governance, share transferability, regulatory compliance and managerial processes.

Choosing between these two corporate structures depends on the business’s specific objectives, scale and the extent to which it seeks to engage with the public and financial markets.