A private company denotes a business with privately held shares by one or more persons and not listed on the public stock exchange. It thus differs from a public company in many interesting respects. Shares issued by public corporations are traded freely on the public market, while private company shares are issued privately and so are not available for trading on the market. Private limited companies are the most common structure for businesses, particularly in countries like India.
What is Private Company?
A private company is a sort of business owned by having a handful of shareholders with shares that are not available for sale to the public. The most common form of this type of business is a private limited company. The primary feature of a private company is that it can restrict the transfer of shares, thereby ensuring that control remains with a few.
Private Company’s Features
Such a structure of a sweet shop is preferred by most private companies because of greater power, less fettering by regulations, and better privacy. These sources include private investors, venture capital, or loans.
- Limited Liability: The liability of shareholders is confined to the amount they invest in the company, thus protecting their personal assets.
- Ownership Control: Private companies typically have few shareholders who help better manage the mode of conducting business operations and decision-making.
- Privacy: Private companies must not disclose their financials to the public, keeping confidentiality with respect to the owners.
- No Public Trading: Shares of a private company are not listed on any public stock exchange. It implies that the shares are not bought or sold by the general public.
Examples of Private Companies:
- Apple (before it went public)
- Facebook (before it became a public company)
Private Limited Company vs Public Company
Understanding the difference between a private and a public company is one of the important things because each of them brings its own pros and cons. The only difference between these two types of companies is that both offer limited liability but differ in several important areas, such as ownership, funding, and governance.
| Aspect | Private Company | Public Company |
| Ownership | A small group of investors or a single entity | Owned by shareholders who can buy/sell shares freely |
| Stock Trading | Not listed in the stock exchange | Listed in the stock exchange |
| Disclosure | Limited financial disclosures | Must disclose detailed financial information in public |
| Funding | equity or debt Funded | Government Funded by issuing shares to public |
| Governance | Less number of shareholders means more control | Shareholders may govern few decisions of the governance |
| Regulation | Fewer regulations and compliance requirements | More regulation and legal requirement access to the public |
Benefits of Private Firms
- Owner control: Business decisions are made in full control by the owner, not influenced by outside shareholders.
- Confidentiality: Limited disclosure means extracting sensitive financial data and setting it aside as private.
- Flexibility: More freedom in everything, including making decisions, and without the strict rules of public companies.
Drawbacks of Private Companies
Funding Gap: Without public access to capital, it becomes very difficult for private companies to raise large amounts of capital at quick notice.
Ownership Transfer: In a private company, it is usually harder to sell shares or transfer ownership compared to a public company.
Structure of a Private Company
A private company would possess a strong and clear organizational structure. Most private companies are structured to have a close group of shareholders or owners, which keeps governance very simple. A private limited company is by far the most popular model for private companies.
Key Roles in a Private Limited Company
This structure is aimed at being as simple as possible and has as few management layers as possible. With this streamlined approach, decisions can be made more quickly without much red tape than in a public company.
- Shareholders: They own the company and share its profits. They have limited liability.
- Directors: They deal with the daily activities of the company. Directors are appointed by shareholders.
- Company Secretary: She oversees the administration of the company with respect to compliance with the provisions of legal requirements.
- Auditors: Auditors are the ones who audit the financial statements of the company.
Example of Private Company Structure:
- Founders: Owners who provide the capital to start the business.
- Investors: Individuals or corporations who fund the enterprise in exchange for equity.
- Managers: Handle the operations and day-to-day business affairs.
Legal Considerations of a Private Company
Operating a private company involves legal formalities, which vary from jurisdiction to jurisdiction but generally focus on tax compliance, shareholder agreement compliance, and corporate governance standards.
Important Legal Requirements for Private Limited Companies
- Incorporation: A private company is required to be duly incorporated. This process is, in India, governed by the Companies Act, 2013.
- Memorandum and Articles of Association: These state the objective, structure, and rules for the operation of a company.
- Shareholder Agreements: A formal agreement regulating the relationship between shareholders, limits to share transfers, and the methods of resolving disputes.
- Annual Filing: All private limited companies must file some documents annually with the local authorities. This may include financial statements, annual returns, and possibly compliance reports as well.
Legal Advantages of Private Companies
- Limited Liability: Personal assets of shareholders are secured against any liabilities of the business.
- Separate Legal Entity: A private company is considered to be a separate legal entity, and can own assets, enter into contracts, and sue or be sued not on behalf of its owners.
Advantages of Private Company
Forming a private company is, therefore, the most suitable decision for most entrepreneurs and investors because of all these advantages.
Limited Liability
The first and foremost benefit of a private corporation is limited liability as a separate legal entity for its shareholders. It is construed as putting the personal assets of an individual shareholder at risk if the company is unable to repay debts or is failing financially.
Control and Flexibility
Having fewer shareholders allows private companies to have more autonomy in their affairs. The private company will have less demand for discourses among the board members, nor will there be many shareholder votes facilitating the management’s actions.
Confidentiality
Not like public companies. A private company does not require disclosing specific financial information to the general population, which promises confidentiality about its finances.
Fewer Management Difficulties
This control structure tends to provide a very simplified governance structure, which reduces the burdens of answering to the corporation’s management daily due to having fewer shareholders and investors.
Raising Money
Although they can’t raise money through an issue of shares in public, private companies have plenty of ways to access capital as private equity investors, venture capital, or debt finance.
Disadvantages of a Private Company
One drawback of operating a private company is that a number of negatives should also be considered before pursuing this mode of setup.
Limited Access to Funding
Since public companies raise funds by issuing shares to the general public, private firms cannot do so, thus severely limiting their capacity to raise capital through private funding.
Restrictions on Transfers of Shares
Shares of a private company cannot be freely traded. The shareholders must agree to the transfer of ownership, thereby making it harder to ‘exit’ from the venture.
Limited Marketability
The inability to sell shares on the stock exchange limits the liquidity and marketability of a private company’s shares, thus making the effort to attract investors even harder.
Private Company FAQs
1. What is defined as a private corporation?
A private corporation is a business that limits equity and ownership to a few individuals and that does not freely trade shares on the stock market.
2. Can you give some examples of a private company?
A few examples would be Infosys BPM, Reliance Retail, and Tata Sons.
3. Which are the major private companies?
The top private companies in India are Tata Sons, Reliance Retail, HCL Technologies, and Zoho Corporation.
4. Under the Companies Act 2013, how is a private company defined?
According to the Companies Act 2013, a private company restricts the transfer of shares; limits its membership to 200, and prohibits shares from being offered to the public for subscription.
5. What is the minimum turnover limit for becoming a Private Limited Company?
There is no minimum turnover limit for registering or running a Private Limited Company in India.
