Difference Between Public and Private Company

Companies can be public and private in nature. While public companies issue their shares to the public, private companies limit it to only certain shareholders. In terms of market cap and influence, public companies are much bigger in size. In this article, we will be discussing the difference between public and private company in this article. There will be a 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 Companies

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

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 the 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 fulfil the following criteria:

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

Characteristics

The 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 of A Public Company

The following are the advantages of public companies:

1. Public companies raise funds and capital 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 future. 
3. Risk is mitigated by sharing their risk. For this, they can sell shares to the public to recover their losses. 

Limitations of a Public Company

• High compliance costs: Public companies face strict regulations and reporting requirements, leading to significant compliance costs.
• Loss of control: Ownership is dispersed among many shareholders, diluting the control of the original owners or founders.
• Short-term focus: Pressure to meet the quarterly earnings expectations may lead to shifting the focus to short-term results instead of a long-term strategy.
• Public scrutiny: Public companies operate under intense public and media scrutiny, which can impact their reputation.
• Risk of takeover: Public companies are vulnerable to hostile takeovers, where another company can acquire a controlling interest.
• Disclosure of information: They are required to disclose sensitive financial and operational information, which can benefit competitors.

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 prevents outside intervention.

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Characteristics

The following are the characteristics of a private company:

• Members: A private company must have at least a minimum of two members and a maximum of two hundred members.
• Directors: Private companies should have at least two directors and a 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 separate from its directors and shareholders.

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Advantages of a Private Company

There are many advantages of private companies:

1. Tax efficiency: 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, and 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 the 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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Limitations of a Private Company

• Limited access to capital: Raising capital can be more challenging compared to public companies, with fewer avenues for funding.
• Restrictions on share transfer: Shares are not freely transferable, limiting liquidity for shareholders.
• Less public awareness: Private companies generally have lower public profiles, which can affect their brand recognition and growth.
• Succession planning challenges: Transferring ownership and management to the next generation can be complex.
• Limited growth potential: The inability to raise large amounts of capital through public markets can restrict expansion opportunities.
• Higher cost of capital: May face higher interest rates on loans due to the perceived higher risk by lenders.

Private companies prioritize owner control and reduced regulatory burden but face limitations in raising funds, while public companies enjoy greater access to capital markets but sacrifice some control and face increased monitoring. A company's lifecycle stage can influence this decision. Startups mostly begin as private entities and later on, transition to public status as they mature and seek larger investments for expansion.

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