Difference Between a Limited Company and a Private Limited Company

Introduction

The present article deals with the concept of company as per Indian Law. It further deals with the two different types of company, that is, private company and public company. The article further tries to distinguish between a limited company and a private limited company. When we consider a business, it is only a progression of transactions, anyway, a company is much more than that. It isn’t just about a transaction or a well-performed and executed contract. But it is a separate distinct entity. What’s more, it has a pool of individuals who invest into it and are enjoying its products and services. Thus it is working as a lot bigger figure than a minor transaction or a contract.

To guarantee the smooth working of a business undertaking, there were sure laws framed, to maintain the straightforwardness and responsibility towards its investors, called Company Laws. It gives an outline of how a company must function as a lawful element and how it must be overseen.

The Companies Act, 2013 (hereinafter referred as ‘the Act’) has replaced the erstwhile Companies Act, 1956. The Act was enacted on 29 August 2013 and only certain provisions of the Act were notified was and enforced on 12 September 2013. The Act contains 7 schedules and 29 Chapters which are divided into 470 Sections. The law provides the guidelines following which a company must be managed and formed. A company is a legal entity which enters into transactions with other parties regularly. Therefore, it is necessary to protect the other party’s interests as well as the company’s interest.. A Company comes into existence when it is registered with the Registrar of Companies (hereinafter referred as ‘ROC’).

The Act is shaped to consolidate and amend the laws related to companies. The Act extends to the entire India. It similarly applies to every company that is incorporated under the Act. It is applicable on all the insurance and banking companies apart from those companies which are exempted under the Insurance Act, 1938 and the Banking Regulation Act, 1949 respectively Further, the Act applies to every company which deals in the generation or supply of electricity other than the companies exempted under the Electricity Act, 2003.

Concept of Company under the Companies Act, 2013

There are numerous meanings of ‘Company’ given by different legal experts. Section 2(20) of the Act characterizes the term ‘Company’ as: “Company means a company incorporated under this Act or any previous company law.”

Henceforth, to comprehend the significance of a Company, it is essential to take a gander at the distinctive features that clarify the domain of a Company.

Incorporated Association:

A company comes into existence when it gets itself registered with the ROC. The company for this purpose has to submit certain documents with the ROC who registers such documents and gives the company a certification. The Company has to fulfil all the legal requirements before it can be registered.

A Company is a Separate Legal Entity:

One of the most peculiar features of a Company, which makes it unique from other organizations, is that it gets a novel character of being a separate legal entity. Consequently, when you register an organization, you give it a legitimate character with similar rights and powers as a human.

The presence of an organization is different and separate from that of its members. It can possess property, financial balances, raise credits, create liabilities and enter into contracts. As indicated by the law, the rights and liabilities of a Company are different from the subscribers to its Memorandum of Association (hereinafter referred as ‘MOA’).

Likewise, it has a distinct personality which is not quite the same as the individuals who create it. For this reason, members can enter into a contract with the Company and can also gain a right against it or create a liability on it. Be that as it may, for any debts, the creditors can sue the Company but the members can’t.

A Company can possess, enjoy, and dispose a property on its own name. While the investors add to the capital and assets, the organization is the legitimate proprietor of such assets and capital. Further, the investors are not private or joint holders of the organization’s property.

Perpetual Succession:

Another significant element of a Company is that it can keep carrying on its business despite the death of its members until it is wound up on the grounds determined by the Act. Further, the shares of the organization change hands intermittently, however that does not influence the existence of the company.

In straightforward words, the organization is an artificial person which is brought into existence by the law. Thus, it very well may be ended by law alone and is unaffected by the death or indebtedness of its members.

Limited Liability:

One of the significant highlights of an organization is the limited obligation of its members. The obligation of a member is dependent upon the kind of organization.

In a limited liability company, the obligations of the organization in totality don’t turn into the obligations of its investors. In such a case, the risk of its individuals is constrained to the degree of the nominal value of shares held by them. The investors can’t be approached to pay more than the unpaid value of their shares.

On account of an organization limited by guarantee, individuals are at risk just to the degree of the sum guaranteed by them. Further, this liability arises just when the organization goes into liquidation.

But in case of an unlimited company, the liability of the members of such a company is also unlimited. But, such cases are extremely uncommon.

Also Read Meeting of the Board of Directors

Artificial Legal Person:

Another highlight of an organization is that it is known as an artificial legal person. A Company is known as an artificial legal person due to the following reasons:

Artificial because its creation is by a procedure other than natural birth.
Legitimate because its creation is by law, and
An individual in light of the fact that it has similar rights as a person.

Also Read Broad Objectives of Companies Amendment Bill, 2020

Further, a company can own property, open bank accounts, and do everything that a natural individual can do except go to jail, marry, take an oath, or practice a learned profession. Thus, it is a legal individual in its very own sense.

Since an organization is an artificial individual, it needs people to work on its behalf. These people are Directors who can verify the organization’s formal acts either by his signature or through the common seal of the organization. But a company is not a citizen as per law and therefore does not have the rights which are available to a citizen.

Can sue and can be sued:

A company can sue any person and can be sued by any person for any civil wrong on its own name. Moreover, the officer in default can also be sued.

Common Seal:

While an organization is an artificial individual and works through the agency of people, it has an official signature. This is affixed by the officers and workers of the organization on all its documents. This official signature is the Common Seal.

Although, the Companies (Amendment) Act, 2015 has made the Common Seal optional. Section 9 of the Act does not have the expression ‘and a common seal’ in it. This gives an alternative method of approval for companies who don’t wish to have a typical seal.

As indicated by this amendment, if an organization does not have a common seal, the approval will be finished by:

Two Directors or
One Director and the Company Secretary (if the organization has delegated a Company Secretary).

Kinds of Company

Comprehensively there are two sorts of companies based on the number of individuals, a privately owned company, and a public company. In any case, other than this differentiation, there are different sorts of organization. These are characterized based on the liabilities of their investors. They are classified as following:

Companies Limited by Shares:

Here the liability of individuals is limited to the nominal value of their shares. If the shares possessed by an individual are completely paid up, point he has zero liability. On the other hand, if the shares are not completely paid up, he can be called to pay up the balance sum if there should arise an occurrence of liquidation of the company.

Companies Limited by Guarantee:

A few companies are limited by guarantee. This implies the individual’s consent to a sum that they will pay if there should arise an occurrence of liquidation. This amount is also called guaranteed sum. Such liability will arise just in case of winding up of the company.

Unlimited Liability Companies:

Here the individuals from the organization are at risk for the losses of the organization. So if there should arise an occurrence of liquidation andthe assets of the organization are insufficient to cover its liability, the individuals need to pay the remaining amount. Even their private property can be joined. Such sorts of organizations are not found in India.

Limited CompanyLimited implies or alludes to public limited organization. Public limited organization is generally called limited liability organization and has been introduced late in the market. Public Limited organization is a fine blend of association company and business partnership and ensures progressive adaptability by adding the benefits of the two sorts of business components. It is thoroughly subject to the speculator to make the organization direct or a befuddled one. The accessories connected with the limited organization have either limited commitment or sometimes unlimited risk.

A Public Limited Company under the Act is an organization that has limited liability and offers shares to everyone without any discrimination. Its stock can be obtained by anybody, either privately through Initial Public Offering or through trade on the stock market. A Public Limited Company is carefully directed and is required to distribute its actual monetary wellbeing to its shareholders. A public company is an organization that has the authorization to issue registered securities to the overall population through an Initial Public Offering and it is registered on at least one stock exchange board. A public company isn’t approved to start its business tasks just upon attaining a certificate of incorporation. To be qualified to run a public organization, it ought to acquire another document called a trading certificate.

Private Limited Company

The private limited organization consists of shareholders who have limited liability. Also, the shares of the organization can never be offered to the general public. The word limited liability suggests that the shareholders’ liability is simply limited to the sum at first contributed. The first investment incorporates the shares’ ostensible esteem and the premium paid at the period of issuance of shares. The individual assets of the shareholders and executives are overall secured and can’t be taken remembering the true objective to satisfy the organization’s commitments. The private limited organization continues working in the market paying little heed to any alterations in the staff, possession or everything considered work of the organization. The organization will use its name for every legal issue and not the names of the bosses or owners in any case. It is the organization which takes legal activities and enters in some genuine contract.

A private limited organization is a business entity that is held by private proprietors. This sort of entity constrains the proprietor’s liability to their ownership stake and confines shareholders from publicly exchanging shares.

Difference between a limited company and a private limited company

The Act itself provides differences between a public limited company and private limited company. The points of difference are as follows:

Section 2(71) of the Act defines public company whereas Section 2(68) defines the term private company under the Act.
A public limited organization is an organization registered on a perceived stock exchange and the stocks are traded publicly. Whereas, a private limited organization is neither registered on the stock exchange nor they are traded. It is privately held by its individuals.
The minimum number of individuals required to begin a public organization is seven. As against this, the private limited can be begun with a minimum of two individuals.
It is obligatory in a public limited company to call for a statutory general meeting of the members. On the other hand, no such obligation is imposed on a private limited company.
The issue of prospectus or statement instead of the prospectus is required in public limited company for inviting the potential investors to purchase the shares of the company. While on the contrary, this isn’t the situation of a private limited company.
The public organization will require a certificate of commencement after its incorporation to begin its functioning. Rather than this, a private organization can begin its business directly after its incorporation.
The transferability of shares is restricted totally in private limited organization. While the shareholders of a public organization can transfer their shares unreservedly and freely as per their choice.
Since there is a limited number of individuals and fewer limitations, the extent of a private limited organization is limited. In opposite, the extent of a public organization is huge. This is because the owners of the organization can raise capital from the overall population and need to abide by many lawful restrictions.
There is a more prominent administrative weight on a public limited organization. This is because a lot of data must be made accessible to the public who are shareholders or potential shareholders. A great deal of money must be invested into the company to get the reports ready and prepare the disclosures that match with the guidelines given by SEBI.
While it obligatory for public companies to appoint a company secretary, private companies may do as such just at their will.
The maximum number of members which can be in a private limited company is 200 people whereas in public limited company there is no such restriction. In a public limited company, there can be any number of persons as members.
The minimum number of directors required to establish a public limited company is 3 directors. On the contrary, in a private limited company, the minimum number of directors required in a company is 2.
A person can hold directorships of maximum 20 private limited company but he cannot hold more than 10 directorships of a public limited company.
The shares in a private limited company cannot be transferred to another until the other shareholders give their consent to such transfer. On the other hand, in a public limited company, the shares are transferable freely without any interference from the other shareholders.
A private limited company has to compulsorily mention ‘Pvt. Ltd.’ after the name of the company whereas a public limited company has to mention ‘ltd.’.
The financial records of the public limited company are to be disclosed to the public as they are the one who will invest in such a company. While on the contrary, a private limited company does not have to disclose any of its records to the public at large and can maintain the secrecy.
The process of going public is a costly affair which consumes a huge amount of time and also at times deviates the management which in turn affects the functioning of the business. Whereas the private limited company can completely focus towards its functioning and gives proper attention to it.
The regulations imposed on a public limited company are more as compared to the regulations imposed on a private limited company.
In the case of a public limited company, the sources of capital are more as compared to a private limited company. The risk as well is distributed among a huge number of people in a public limited company.
Section 149(4) of the Act makes it obligatory for every public listed company to have at least one-third of its total directors as independent directors whereas no such obligation is imposed on a private limited company.

Also Read APL Industries Ltd. v. Security and Exchange Board of India

Conclusion

Therefore, when a group of individuals establishes a company they have the choice to either opt for a public limited company or private limited company. The individuals should take this decision after careful consideration of the advantages as well as disadvantages of both the type of Companies and must choose which company perfectly suits the requirements. There are various grounds on which a public limited company is different from a private limited company such as minimum number of directors, the minimum number of members, maximum number of members, transferability of shares, documents required, etc. In case of a public limited company, there are certain additional obligations which are imposed on the company but at the same time, they have the benefit of raising capital from a large number of individuals. Whereas in case of a private limited company, the company is bound by fewer obligations but they also have limited sources of capital. One of the major points of difference in both these companies is that in public limited company the shares can be traded openly and issued to the world at large but in a private limited company the company can in no case invite the public and issue the shares to the public. The person willing to form a company must at the very first decide its company’s type so that they fulfill the legal requirements accordingly.