Private Company Vs Public Company

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Private Company Vs. Public Company

A partnership firm and a private company are quite suitable for a medium size business. But generally, a sole proprietorship or a partnership firm converts its business into a private limited company to take the advantage of limited liability. But when the size of business become very large, it may be advisable to convert a private company into a public company. The decision to adopt public company form of organization to meet the needs of the expanding business will depend upon the following factors:

(i)    Organization. A private company is entitled to certain privileges which are not available to a public company. A private company is also exempted from the compliance of certain provisions of the Companies Act. For instance, a private company needs only two members for its incorporation as compared to seven required for the incorporation of a public company. Private companies can commerce business immediately after incorporation whereas a public company has to raise minimum subscription and obtain a certificate of commencement of business before it can start functioning. An entrepreneur may find it more suitable to start a private company in the initial stages and later convert it into a public company by amending articles of associating with respect to the number of members, transferability of shares and invitation of public for the subscription of its shares.

(ii)    Capital. A Private company can raise limited amount of financial resources since there is a limit on the number of its members and the restriction on selling shares to the public. There is no limit on the number of members of a public company. A public company can secure vast amount f funds form the investors scattered throughout the country. A public company can also issue debentures and further borrow funds from the public and financial institutions.

(iii)    Control. There is generally diffusion of control in case f a public company because of a large number of members. But in case of a private company, the promoters can restrict the number of members and keep control of the company with themselves. Sometimes, control may have to be shared with the financial institutions if loans are raised form them. They may insist on conversion clause in the loan agreement under which they can convert their loans into equity shares.

(iv)    Management. The management of a company, whether it is private or public, is entrusted in the hands of an elected Board of Directors. In case of a private company, the members of the Board of Directors are also the owners of the business. In fact, there is little gap between ownership and management though law recognizes the separation of ownership and management. But in case of public company, there is a wide gap between ownership and management.  The number of directors of a public company is quite small compared to its total membership and some of these are elected because of their exceptional talents and qualifications and they may hold only one qualification share each. Thus, pubic company form f organization gives way to professionalism in management.

(v)    Secrecy. Both private and public company are required to file their audited accounts and certain other returns with the Registrar of Companies. In case of a public company, the accounts are widely publicized by sending the printed accounts to a large number of shareholders and the stock exchange where the shares are listed. Thus, a public company can maintain less secrecy as compared to a private company.

(vi)    State Regulation. Since a public company involves public interests, it is subject to several legal formalities under various Acts. The Government has been given wide powers to regulate the working of the public companies. It can issue directions to the public company, can appoint its nominees on the Board of Directors of the company and can even take over the management of the public company in certain circumstance. Thus, there is a greater degree of Government control over the public companies.

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