Types of private company
In India, private businesses can take several forms:
- Sole Proprietorship: The simplest structure, where a single individual owns and runs the business. Legally, the business and the owner are the same, giving the owner full control but also unlimited personal liability for all debts and obligations. Profits are taxed as the owner’s personal income.
- Partnership Firm: Formed under the Indian Partnership Act, 1932, this involves two or more individuals who agree to share profits. Like a proprietorship, partners usually have unlimited liability, making them personally responsible for the firm’s debts.
- Limited Liability Partnership (LLP): Governed by the LLP Act, 2008, an LLP combines the flexibility of a partnership with limited liability protection. Partners are only liable up to their agreed contribution, safeguarding their personal assets from business debts.
- Private Limited Company (Pvt. Ltd.): The most common corporate structure for private businesses in India, regulated by the Companies Act, 2013. It is a separate legal entity from its shareholders, who have liability limited to the value of their shares. Pvt. Ltd. companies can have up to 200 shareholders and cannot offer shares to the public.
Why Do Private Companies Choose to Remain Private?
1. To avoid regulatory and government scrutiny
Public companies face a lot of attention from shareholders, regulators, and the government. They are required to share their financial information publicly by filing quarterly reports, annual reports, and other important updates with government bodies like the Securities and Exchange Commission in the US or similar authorities in other countries.
On the other hand, private companies have the freedom to keep their financial details and operations private, avoiding the strict regulations and government oversight that public companies must follow. Private companies are not legally required to make their financial statements public, although they still need to maintain proper accounting records and provide financial statements to their shareholders.
2. To keep ownership within the family
Some companies choose to remain private to keep ownership within the family. Many large companies in the US, for example, are family-owned and passed down through generations. Going public would mean answering to a large group of shareholders and possibly having to appoint board members who are not part of the founding family.
By staying private, the company has full control over who sits on the board of directors and is only accountable to a small group of shareholders or private investors. Private companies finance their own projects and acquisitions without selling large shares to the public through an Initial Public Offering (IPO).
Features of private company
A private company is a privately owned business with features that distinguish it from public companies:
- Limited liability: Shareholders are only responsible for the amount they have invested.
- Restricted share transfer: Shares cannot be freely sold on the public market; transfers usually require approval from other shareholders.
- No public offering: The company is not allowed to offer shares or debentures to the general public.
- Fewer regulations: Private companies have lighter compliance and disclosure requirements compared with public companies.
- Use of “Private Limited”: Legally required to include “Private Limited” in its name.
- Perpetual existence: The company continues to exist regardless of changes in ownership or the status of its shareholders.
Transitioning from a Private Company to a Public Company
Most public companies begin their journey as private entities, such as family-owned businesses, partnerships, or limited liability companies with a small group of shareholders and advisors. As the business grows, it often needs more money to fund its operations, expand, or acquire smaller companies. This funding typically goes beyond what the company can generate from its own revenue or its close circle of investors.
To meet these financial needs, many private companies decide to become public. This means the company will sell shares of itself to the public through a process known as an IPO. Going public gives the company access to a large pool of capital (money) from investors in the stock market, which can be used for growth and expansion.
Before the company can go public, it must choose an underwriter, usually an investment bank. The underwriter plays an important role in guiding the company through the IPO process. They act as an intermediary between the company and the public investors, making sure the company complies with all government regulations and carries out proper checks (due diligence) to ensure the process is transparent and legal.
Once the company goes public, its privately-held shares are converted into publicly traded shares. The value of these shares is now determined by the market, based on supply and demand. Shareholders who owned the company before it went public can decide whether to keep their shares or sell them to new investors. If they choose to sell, they may make a profit, as the public trading price of the shares could be higher than what they originally paid.
In summary, going public allows a company to raise substantial funds, but it also involves careful planning, regulatory requirements, and decisions about ownership. While it can be a great way to finance further growth, it also comes with new responsibilities, as the company is now answerable to a large number of public shareholders.
Formation process of private companies
- Name reservation: Choose and reserve a unique name for the company.
- Drafting MOA: Prepare the Memorandum of Association (MOA) outlining the company’s objectives and structure.
- Registration: File the necessary documents, including the MOA, with the relevant government authority.
- Obtaining PAN and TAN: Acquire a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) for tax purposes.
- Issuing shares: Allocate shares to the initial shareholders as per the company’s share structure.
Advantages and disadvantages of private company
Many businesses choose to stay private to avoid the high costs and strict regulations of being a publicly listed company. Remaining private helps a company save on IPO expenses, avoid complex compliance requirements (like publishing quarterly financial reports for regulators and the public), and keep business strategies and financial information confidential from competitors.
Private ownership also allows founders and owners to retain full control over the company’s direction and long-term plans. This is particularly important for India’s family-run businesses, enabling them to focus on legacy and long-term goals rather than short-term market pressures.
However, there are trade-offs. Raising large amounts of capital can be harder without access to public stock markets. Growth must rely on internal profits, bank loans, or private investors, who may demand significant equity or control. Additionally, in structures like sole proprietorships and partnerships, owners have unlimited personal liability. If the business faces financial difficulties, their personal assets may be used to cover debts, affecting their personal finances.
Pros
|
Cons
|
Avoids high IPO costs
|
Harder to raise large-scale capital
|
Lower regulatory and compliance burden
|
Owners may have unlimited personal liability (in some structures)
|
Business information stays private
|
Possibility of disputes between owners/partners
|
Owners retain full control
|
Limited liquidity as shares cannot be easily sold
|
What is the average size of a private company?
The average size of a private company can vary widely depending on the industry and location. In India, private companies range from small startups with just a few employees to large firms with hundreds of employees. Typically, small to medium-sized private companies have fewer than 200 employees and generate moderate revenue compared to large public corporations. The size of a private company often reflects its growth stage, market focus, and operational scale.
Private vs. Public companies
The difference between a private and a public company is given in the table below:
| Aspect |
Private Companies |
Public Companies |
| Share Trading |
Shares are not traded publicly. |
Shares are traded on public stock exchanges. |
| Disclosure |
Less financial disclosure required. |
Must adhere to strict disclosure requirements. |
| Ownership |
Limited to a small group of investors. |
Ownership is distributed among public shareholders. |
| Regulation |
Fewer regulatory requirements. |
Subject to extensive regulatory oversight. |
| Capital Raising |
More challenging, relies on private sources. |
Easier through public markets. |
The main difference between a private and public company lies in the trading of shares and regulatory requirements. Private companies enjoy greater control and flexibility but face challenges in raising capital. Public companies benefit from wider access to capital but must comply with rigorous regulations.
Conclusion
Private companies form the backbone of India’s business ecosystem, giving owners greater control, flexibility, and confidentiality. They avoid public scrutiny and complex regulatory requirements but often face challenges in raising large-scale capital. Many private businesses address this through financing options such as business loans, which provide quick access to funds for growth or day-to-day operations. Checking business loan eligibility and comparing business loan interest rates are important for sound financial planning. Staying private allows companies to focus on long-term growth and independence, though it can limit liquidity and funding opportunities. Success ultimately depends on balancing control with careful financial management and strategic expansion.
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