Private vs Public Companies
A company is a separate legal entity and is isolated from the owners of the business. Many of us have observed that some company names are followed by the suffix ‘Pvt. Ltd’ and others are followed by ‘PLC’. These names denote private limited companies and public limited companies, and both these types of companies are different in terms of their composition, legalities in formation and operation, methods of raising capital, disclosure requirements and regulations to be followed. This article attempts to help the reader understand the clear differences between the two and the possible pros and cons that are attached to each form of organization.
A private company is made of a small number of individuals who collectively hold all the shares in the company. Private limited companies are not able to raise funds in capital markets as they are not listed in the stock exchange, and will have to resort to borrowing funds from banks and other lending entities. The advantages of private companies are that they are not required to answer to shareholders, and their reporting requirements are limited as they do not have to disclose all their financial information. In the case of the sale of shares, shareholders are not allowed to sell shares without the consent of the rest of the shareholders. Furthermore, it is possible for a private company to start business activities once it has been incorporated, private companies are not allowed to issue a prospectus, because of their legal formation that makes it impossible for them to sell shares to the public.
A public limited company is a firm that has a number of shareholders, who have the right to sell shares and buy shares in the company as and when they wish. This means that public companies are able to list their shares on the stock exchange and are able to raise funds in capital markets. This gives them better access to funds and lower costs in relation to interest payments to lending institutions. Public companies are subject to stringent disclosure requirements and are supposed to submit the periodical financial statement to the Securities and Exchange Commission, where this information is made public for shareholders and other stakeholders of the firm. A possible disadvantage for a public company is that the decision making may be affected by the need to keep the shares attractive to shareholders in the short term, while achieving higher levels of profitability in the long term, and in most situations achieving both at the same time may be difficult.
What is the difference between Private and Public Companies?
A private limited company and a public limited company are both separate legal entities. Both these companies have limited liabilities, which mean that the shareholders of the firm are only responsible for any losses to the extent of the value of their share holding in the firm. A public limited company is subject to many stringent reporting and disclosure requirements, whereas a private limited company is not required to disclose as much information. Public companies can raise funds in the capital markets, therefore, submit a prospectus for the inspection purposes of the public. Private firms have their shares closely held by a few known individuals and the shares cannot be sold without the consent of all shareholders. A public firm needs to wait for the certificate of commencement to start business operations even after it is incorporated, whereas a private firm can start a business as soon as it is incorporated.
In a nutshell:
Private Company vs Public Company
• Both private companies and public companies have limited liability; they are considered as separate legal entities.
• Public firms have access to a larger capital base through issuing shares in a stock exchange, while private firms have to rely on a costlier method of borrowing funds from lending institutions.
• Private firms can decide what to disclose, but public firms have stringent reporting requirements and need to file their periodical financial statements with the SEC.
• Public company shares can be bought and sold by anyone, but the private company shares can only be sold with the consent of the rest of the owners of the business.