Before starting a business, it is important to have a thorough understanding of the various options of business structures available and the ramifications of each of them. Here, we will go through the fundamental distinctions of two business structures, namely a Public Limited Company and a Private Limited Company.
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This article will examine the variations among public and private limited companies that lead to a distinction in their names. The parameters of distinction we have followed include legal definition, conditions of formation, post incorporation compliances, and terms for internal management .
A private Limited Company is a company where the transfer of shares are restricted to investors, and not to the general public. Moreover, the shares of a Private Limited Company cannot be traded on public platforms like stock exchange markets, and can be only traded in a private manner. Note that a stock exchange platform does not impose any restrictions on the transfer of shares of public limited companies.
A private limited company is never allowed to solicit investors to purchase its shares or debt obligations. Additionally, the company is not permitted to take public deposits other than those made by its owners, directors, or their family members.
A Private Limited Company can be set up with at least two shareholders. However, the maximum limit of its shareholders can reach as many as 200.
Private limited companies can be subdivided into three broad categories, based on their minimum capital or turnover limit, and the primary purpose of their formation.
One-person companies are owned by a single shareholder. The single owner invests all the capital in the company, or, in other words, buys all its shares. As a result, he is entitled to the sole ownership of the company, and receive all the profits earned by it.
The liability of the sole owner, is however, restricted or limited, only to the worth of shares he has bought in the company. A One Person Company may be established for any permitted purpose. Also, its sole owner needs to be an individual who is an Indian citizen and an Indian resident only.
The minimum amount of paid-up capital to set up a One Person Company is Rs.1 lakh, while the maximum paid-up capital limit is Rs.50 Lakhs. A company will become ineligible to exist as a One Person Company, if its paid up capital exceeds Rs.50 lakhs, or his annual turnover exceeds Rs. 2 crores.
Any Private Limited Company with a minimum paid up capital of Rs. 4 crores, and a minimum annual sales turnover of Rs.40 crores can be classified as a Small Company. Time and again, the government brings out schemes and initiatives to nudge the growth of small businesses. Small companies can easily avail the benefits of several policies introduced by the government.
Section 8 Companies are Private or Public Limited companies registered under Section 8 of the Companies Act, 2013. These Companies are non profit earning non governmental organizations formed for specific purposes as prescribed under Section 8 of the Companies Act, which include promotion of religion, charity, social welfare, art, literature, culture etc.
A Public Limited Company is one of the many preferred forms of business structures in India. A public limited company is a company incorporated under the Companies Act, 2013. That offers limited liability to its owners and shareholders. Its shares can be traded on public platforms like stock exchange, and are open for sale to the general public as well.
A Public Limited Company is regulated by the Ministry of Corporate Affairs and the Securities and Exchange Board of India (SEBI). It is subject to stringent laws by these regulatory agencies, and is required to regularly update its shareholders of its genuine financial situation.
As a legally incorporated entity, a public limited company has a distinct legal identity, and is entitled to the right to hold properties and assets in its name.
A private limited company and a public limited company differ primarily in the following ways:
| Parameters | Private Limited Company | Public Limited Company |
|---|---|---|
|
Transfer of Shares
|
Not open to General Public
|
Open to General Public
|
|
Trade of Shares
|
Not allowed on Stock Exchange
|
Allowed on Stock Exchange
|
|
Number of shareholders
|
Minimum 2 Maximum 200 |
Minimum 7 No maximum limit |
|
Number of Directors
|
Minimum 2 Maximum 15 |
Minimum 3 Maximum 15 |
|
Drafting Prospectus
|
Optional
|
Mandatory
|
|
Appointing a Company Secretary
|
Optional
|
Mandatory |
|
Transferability of Shares
|
Restricted
|
Not Restricted
|
Conclusion
The choice of business structure always reflects the needs and purpose of your business. Thus, making an informed decision in this context is extremely important. This can be done by analyzing the pros and cons of each business structure against the other, and testing its compatibility with the goals of your business.