Features of A Private Limited Company and Public Limited Company

Private Limited Company and Public Limited Company have certain similar features as following:

1. No personal liability of owners and their personal assets for debts and obligation of the business. This is a major concern especially for business with a high volume of investment and loans. 

Personal assets of the promoters are not impacted by the liabilities of the company (unless a personal guarantee if provided for companies’ obligations)

2. Companies are taxed for their entire profit. Apart from that, distribution of profits in a company attracts a dividend distribution tax (DDT) on the profit paid out.

3. A detailed incorporation process and filing process is to be followed out. The process is comparatively more expensive than the other structures of a business.

4. In terms of foreign investment and foreign loans, Companies are considered the best structure of the business.

a. Since ownership rights and management rights are separated, financial investors, venture capitalists and private equity investors are comfortable investing in companies. Further majority of sectors in India are open to foreign investment without any regulatory approval. Foreigners can invest in companies as per the consolidated FDI policy. Only a few selected sectors require regulatory approval. 

b. A company is entitled to obtain foreign loans in software, hotel, and hospitality, manufacturing sectors without any regulatory approval.  

5. The yearly cost of compliance in case of the company can be substantial. Under the Companies Act, 2013 and rules, a limited liability company is required to prepare and file financial statements such as balance sheet, profit, and loss accounts, hold meetings, prepare directors reports, arrange or mandatory audit, maintain specific registers, appoint auditors etc.

6. Event-based filings like filing of various kinds of resolutions on key events pertaining to business are mandatory for the company.

7. Employee Share Ownership Plans (ESOPs) are also known as Employee Stock Ownership Plans is a way available to companies way to incentives their employees. These provide a company’s workforce with an ownership interest in the company.

Due to the existence of the concept of shares, it is easy to give a definite amount of shares to an employee without handing out any effective control. This incentivized employee to work hard and benefit subsequently from the increase in valuation of the shares, as they can sell their shares and make a windfall gain. 

This has especially been true in recent time for information technology sector, whose market value has increased multifold in a short span of time.

8. Director loans- Transactions between founder and the company are very common especially during the early stage of business when the promoters and founder often take little or no salaries. For example: when the business faces a cash crunch, a founder may provide a loan to help the business though OR, when the business is cash positive, a founder may need to draw money out from the business for his own needs.

Public Company vs. Private Company- which is better for the business?

While deciding company registration as Public or Private, following must be kept in mind: 

1. Ability to raise access to public funds-

A private limited company cannot have more than 200 members and it cannot raise funds, whether equity or debt, from the public, either in India or aboard. It cannot accept public deposits either. 

The ability to raise funds from the public is a significant advantage for a mature company, as it enables them to obtain large quantities of finance cheaply and scale up the operations. This option is available only to the Public Companies. It can be noticed that the eventual goal of a new business which raises venture capital or private equity is to ‘go public’ and list shares on a stock exchange, which denotes that it has achieved certain scale and market validation for its business model (apart from offering investors opportunities to make windfall gains)

2. Restriction on transfer ability of shares -

Unlike that of the private limited company, shares of a public company are freely transferable and a public company is not allowed to impose restrictions on their transfer. 

Private equity investors and venture, capitalists who invest large amounts of capital in companies, impose various kinds of restrictions on share transfer as a matter of practice, to ensure that they are given preference when promoters are considering options to raise finance. The end goal of the investors is to recoup their investment and make some returns on it.

The Companies Act 2013 has a modified provision now- although it states that public company shares are freely transferable, it allows a shareholder to impose a restriction on transfer through private contracts. 

Section 58 (2) states that ‘Without prejudice to sub-section (1), the securities or other interest of any member in a public company shall be freely transferable: Provided that any contract or arrangement between two or more persons in respect of the transfer of securities shall be enforceable as a contract’