Private Company and Public Company, Meaning, Features and Differences
Private Company
Private Company is defined under Section 2(68) of the Companies Act, 2013 as a company having a minimum paid-up share capital as may be prescribed, and which by its articles of association:
- Restricts the right to transfer its shares,
- Limits the number of its members to 200, excluding current and former employee-members.
- Prohibits any invitation to the public to subscribe to any of its securities.
Private company is typically closely held, meaning its shares are not traded publicly and are held by a small group of investors, promoters, or family members. It enjoys certain exemptions and privileges under the Act to reduce the burden of compliance, making it a popular form of incorporation for startups, small businesses, and family-owned enterprises.
The company must have a minimum of two members and two directors, but it cannot raise capital from the general public through a stock exchange. Private companies are also exempted from appointing independent directors or constituting audit and nomination committees, unlike public companies.
While offering limited liability protection and perpetual succession, a private company combines the benefits of a corporate entity with the flexibility of a partnership. This makes it a suitable structure for small to medium-sized enterprises seeking legal recognition with minimal public exposure and regulatory obligations.
Examples include Flipkart India Pvt. Ltd., Infosys BPM Pvt. Ltd., and other unlisted business entities operating under the private company model.
Features of a Private Company:
- Restriction on Share Transferability
One of the primary features of a private company is the restriction on the transfer of shares. The Articles of Association must explicitly limit the right of shareholders to transfer their shares to outsiders. This restriction ensures that ownership remains within a close group, protecting the company from hostile takeovers and maintaining the confidence and trust among existing shareholders. Although shares can be transferred with approval, it ensures that only desired individuals become part of the ownership structure, maintaining control within a limited circle.
- Limited Number of Members
Private company can have a maximum of 200 members, as per the Companies Act, 2013. This excludes current employees and former employees who were members during their employment. The limited membership ensures more manageable and controlled decision-making, especially in small and medium enterprises. Unlike public companies, which can have unlimited shareholders, private companies remain closely held entities, often involving family, friends, or close business associates. This limited membership requirement makes private companies ideal for those wanting flexibility without extensive regulatory exposure.
- Minimum Capital Requirement
Earlier, a minimum paid-up capital of ₹1 lakh was required to form a private company. However, the Companies (Amendment) Act, 2015 removed this mandatory requirement, and now, a private company can be formed with any amount of paid-up capital. This relaxation encourages small entrepreneurs and startups to incorporate businesses easily. Although there is no specific capital requirement, a company must have enough capital to meet its operational and regulatory obligations, ensuring that it functions effectively and responsibly without unnecessary financial barriers at the start.
- Separate Legal Entity
Private company is considered a separate legal entity distinct from its owners (shareholders). This means the company has its own legal identity and can own property, enter into contracts, sue or be sued in its own name. This separation ensures that the company’s liabilities are its own and not personally attributable to its members. It helps in building credibility and trust in the business and allows continuity of operations even if the ownership or management changes, making it a preferred structure for long-term business stability and legal protection.
- Limited Liability of Members
The liability of members in a private company is limited to the extent of their shareholding. This means that in the event of financial losses or debts, shareholders are not personally responsible for the company’s obligations beyond the unpaid amount of their shares. Personal assets of shareholders are protected, which is a major advantage over sole proprietorships or partnerships. This limited liability feature provides a sense of security and encourages individuals to invest in or start companies without the risk of personal financial ruin.
- No Invitation to Public for Securities
Private companies are prohibited from inviting the public to subscribe to their shares, debentures, or other securities. This feature distinguishes them from public companies, which can raise capital through public offerings. The restriction ensures that private companies remain privately funded, often through internal sources or private equity investors. This makes regulatory compliance simpler and avoids the complexities involved with public disclosures and SEBI regulations. It also ensures that control remains within a close group of investors, aiding quick decision-making and confidentiality.
- Fewer Compliance Requirements
Compared to public companies, private companies enjoy several exemptions and relaxed compliance norms under the Companies Act, 2013. They are not required to appoint independent directors, hold elaborate general meetings, or form mandatory committees like the Audit or Nomination Committee. This reduces the administrative burden and operational costs, allowing entrepreneurs to focus on business growth rather than being overburdened with legal formalities. However, basic compliance such as annual filings, statutory audits, and board meetings still need to be conducted in accordance with the Act.
- Perpetual Succession
Private company enjoys perpetual succession, meaning its existence is not affected by the death, insolvency, or incapacity of any of its members or directors. It continues to exist as a legal entity until it is formally dissolved according to the provisions of the Companies Act. This ensures continuity in operations and builds long-term trust with stakeholders such as employees, suppliers, customers, and lenders. The company can sign contracts, own property, and maintain operations independently of changes in ownership or management.
- Minimum Two Directors and Members
To incorporate a private company, at least two directors and two members are required. These can be the same individuals or different people. One of the directors must be an Indian resident. This requirement makes it easy for small businesses or families to incorporate private companies with minimal personnel. The flexibility to have the same person as both a shareholder and director adds to the convenience of managing operations efficiently without involving too many external parties in decision-making.
- Use of “Private Limited” in Name
Every private company is required to add the words “Private Limited” at the end of its name. This distinguishes it legally from public companies and informs the public and stakeholders about its structure. The suffix reflects its private nature, restricted shareholding, and limited liability status. It also signals that the company is registered and governed by the Companies Act, 2013, helping establish trust and credibility in commercial and contractual dealings.
Public Company
Public Company is defined under Section 2(71) of the Companies Act, 2013 as a company which is not a private company and has a minimum paid-up share capital as prescribed under law. Unlike private companies, public companies can invite the general public to subscribe to their shares or debentures and may be listed on recognized stock exchanges.
A public company must comply with the following key requirements:
-
Minimum of seven members with no limit on the maximum number of shareholders.
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At least three directors are required to manage the company.
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Shares are freely transferable, enabling public participation and liquidity.
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It may raise funds through Initial Public Offerings (IPO), Follow-on Public Offers (FPO), and other means allowed under SEBI regulations.
Public companies are subject to stricter disclosure, audit, and corporate governance norms. They are required to file regular financial reports, conduct annual general meetings (AGMs), appoint independent directors, and establish committees such as the Audit Committee and Nomination & Remuneration Committee.
These companies play a major role in the economic development of the country by mobilizing public savings for investment and growth. They offer opportunities for the general public to invest and share in profits through dividends and capital gains.
Examples of public companies in India include Tata Motors Ltd, State Bank of India, and Infosys Ltd. Public companies promote transparency, broader ownership, and accountability in the corporate sector.
Features of Public Company:
- Unlimited Membership
A key feature of a public company is that it can have an unlimited number of members or shareholders. The minimum requirement is seven members, but there is no maximum limit. This allows the company to raise large amounts of capital from the public by issuing shares. The wider ownership base also spreads the financial risk. Having more shareholders promotes better transparency and accountability in governance, and such companies often have to follow stricter rules to protect the interests of this diverse and dispersed ownership.
- Free Transferability of Shares
In a public company, shares can be freely transferred by shareholders without the consent of other members. This feature enhances the liquidity of shares, making them attractive to investors. It also allows shareholders to exit or enter the company without procedural complexity. The ease of transferring shares facilitates trading in the stock market, which is crucial for companies listed on recognized stock exchanges. Free transferability ensures that ownership can be restructured efficiently and that the company can attract public investment.
- Invitation to Public for Subscription
A public company is legally permitted to invite the public to subscribe to its shares, debentures, and other securities. This is typically done through Initial Public Offerings (IPOs), Follow-on Public Offers (FPOs), or other market instruments. By doing so, the company can raise significant capital for expansion, development, or debt repayment. This is a major feature that distinguishes public companies from private companies, which are prohibited from seeking funds from the public. Public invitation also necessitates regulatory compliance and transparency.
- Listing on Stock Exchange
Many public companies choose to list their securities on recognized stock exchanges such as BSE or NSE. Listing provides the company access to a wide investor base and helps in raising capital efficiently. Listed companies are subject to the rules and regulations of the Securities and Exchange Board of India (SEBI) and must comply with disclosure norms, corporate governance standards, and investor protection measures. Being listed also boosts credibility, visibility, and trust among investors and stakeholders.
- Stringent Regulatory Compliance
Public companies must follow strict legal and regulatory compliances as per the Companies Act, 2013, and SEBI regulations. These include maintaining proper books of accounts, appointing statutory auditors, conducting Annual General Meetings (AGMs), filing annual returns, and disclosing financial results. They are also required to maintain transparency through regular disclosures to shareholders and the public. Non-compliance can result in penalties and loss of investor confidence. These rules aim to protect the interests of public shareholders and promote good governance practices.
- Separate Legal Entity
Public company, like all registered companies, is a separate legal entity distinct from its members. It can own property, enter into contracts, sue or be sued in its own name. This legal separation ensures that the company’s obligations and liabilities do not affect the personal assets of its shareholders. The corporate entity status continues even if the ownership changes, offering operational stability and legal protection. This principle is foundational to corporate law and underpins the rights and responsibilities of public companies.
- Limited Liability of Shareholders
In a public company, the liability of shareholders is limited to the unpaid amount on their shares. If the shares are fully paid, the shareholders have no further financial liability toward the company’s debts or obligations. This feature protects individual investors from financial risk beyond their investment. It encourages public participation in company ownership and investment, as individuals are assured that their personal assets are not at stake if the company fails or incurs losses.
- Perpetual Succession
Public companies enjoy perpetual succession, meaning their existence is unaffected by changes in membership such as death, insolvency, or retirement of any shareholder or director. The company continues to exist and operate until it is legally dissolved through a winding-up process. This continuity is essential for long-term projects and investor confidence. The stability offered by perpetual succession ensures that the company can enter into long-term contracts, maintain business operations, and build sustainable relationships with stakeholders.
- Minimum Number of Directors and Members
Public company must have a minimum of seven members and at least three directors to be incorporated under the Companies Act, 2013. There is no upper limit on members, allowing mass public ownership. The requirement for multiple directors helps bring diverse perspectives and professional management to the company. It also promotes democratic decision-making and accountability in corporate governance. The Board of Directors is responsible for managing the company’s affairs and ensuring statutory compliance.
- Use of “Limited” in Name
Public company must end its name with the word “Limited” to indicate its legal status and limited liability structure. For example, “Reliance Industries Limited” or “Tata Steel Limited.” This naming convention informs stakeholders, including customers, vendors, and investors, that the company is governed by corporate laws and that the liability of shareholders is limited. It also distinguishes public companies from private limited companies, where the word “Private” is used in the name to reflect their different legal and operational characteristics.
Key Differences between Private Company and Public Company
Aspect | Private Company | Public Company |
---|---|---|
Minimum Members | 2 | 7 |
Maximum Members | 200 | Unlimited |
Name Suffix | Pvt. Ltd. | Ltd. |
Share Transferability | Restricted | Freely Transferable |
Public Invitation | Not Allowed | Allowed |
Stock Exchange Listing | Not Listed | Listed |
Minimum Directors | 2 | 3 |
Annual General Meeting | Not Mandatory | Mandatory |
Regulatory Compliance | Less | More |
Capital Raising | Private Sources | Public Offerings |
Disclosure Norms | Minimal | Extensive |
Independent Directors | Not Required | Required |
Governance Norms | Relaxed | Strict |
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