Thursday, April 24, 2008
a). Private Companies
Private companies are all companies that are not public companies. A private company is not permitted to offer its shares to the public. Due to the capitalization requirements, the vehicle tends to be used for smaller businesses. Where a private company is limited by its shares, shareholders are liable to contribute to the assets any unpaid amount on shares issued to that shareholder. The nominal value of the shares, including premiums payable on subscription, determines the amount which is payable. Where a private company is limited by guarantee, shareholders will be liable to contribute to the assets of the company the amount required for payment of the company’s debts and costs of winding up, up to the maximum set out in the memorandum.
b). Public Companies
A public company must be limited by shares; the memorandum must explicitly state that it is a public company. The name must end with “public limited company” or the abbreviation "PLC". If there is less than two shareholders of the company for more than six months, the single member will be jointly and severally liable with the company for its debts, thus limited liability protection will be lost, as the company does not satisfy the requirements of the Act.
DIFFERENCES BETWEEN THE TWO COMPANIES
1. Private company is privately held. This means that in most cases, the company is owned by the company's founders, management or a group of private investors. A public company, on the other hand, is a company that has sold a portion of itself to the public via an initial public offering of some of its stock, meaning shareholders have claim to part of the company's assets and profits.
2. A private company’s memorandum and articles of association need only be subscribed by two persons, and the members of a private company only incur personal liability for its debt if its membership falls bellow two. While a public company is not so.
3. A private company may commence business on its corporation, it does not hold a statutory meeting or issue a statutory report and it may issue shares and debentures without delivering a statement in lieu of prospectus to the Registrar of Companies. While a public company is not so.
4. A private company may not issue share warrants or freely renounceable letters of allotment in respect of its share. The Companies Act 1948 does not expressly so provide but no effective restriction could be imposed on the transfer of the company’s shares in compliance with the Companies Act 1948, if they were represented by share warrants or such letters of allotment. However, there is nothing in the Act to prevent a private company from issuing bearer debentures or from issuing renounceable letters of allotment in respect of its shares of debentures, provided in the case of shares, that they are subject to some restriction on their transferability both while letters of allotment are outstanding and when they are eventually registered in the register of members.
5. Formation of a public company requires a minimum of two directors. In general terms, anyone can be a company director, if they have fulfilled the required rules. On the other hand, a private company need have only one director. Two or more directors of a private company may be elected by a single resolution at general meeting, a director of a private company which is not subsidiary of a public company does not retire by operation of law at the annual meeting, nor is necessary for a resolution to elect or re-elect such a director.
6. Unless its articles otherwise provide the quorum at a general meeting of a private company is two persons present in person. A member may appoint only one proxy to represent him at such a meeting unless the articles permit the appointment of more than one, and any proxy may speak as well as vote at the meeting.
7. With its annual return a private company must send to the Registrar of Companies a certificate by signed by a director and the secretary that the company has not since the date of the preceding annual return, or, in the case of the first return, since the date of its incorporation issued an invitation to the public to subscribe for its shares or debentures and, if their company’s membership exceeds fifty a further certificate that the excess consists of members who are employees of the company or former employees who became members while employed by it.
8. Difference between the two types of companies deals with public disclosure. If it's a public U.S. company, which means it is trading on a U.S. stock exchange, it is typically required to file quarterly earnings reports (among other things) with the Securities and Exchange Commission (SEC). This information is also made available to shareholders and the public. Private companies, however, are not required to disclose their financial information to anyone since they do not trade stock on a stock exchange.
9. The difference in main advantage: Public company has ability to tap the financial markets by selling stock (equity) or bonds (debt) to raise capital (i.e. cash) for expansion and projects. While private company’s advantage is that its management doesn't have to answer to stockholders and isn't required to file disclosure statements with the SEC. However, a private company can't dip into the public capital markets and must therefore turn to private funding, which can boost the cost of capital and may limit expansion. It has been said often that private companies seek to minimize the tax bite, while public companies seek to increase profits for shareholders.
10. Private companies may issue stock and have shareholders. However, their shares do not trade on public exchanges and are not issued through an initial public offering. In general, the shares of these businesses are less liquid and the values are difficult to determine. A public company has sold a portion of the business to the public via an initial public offering. IPO can generate intense news coverage and going public can be seen as coming of age for companies in hot sectors.