Public vs. Private Companies: Key Differences and Legal Structures
Public vs. Private Companies: Key Differences
The term “company” has evolved significantly over time. In today’s world, a company is an association of individuals formed for a common purpose. Companies can be broadly categorized as either public or private, each with distinct characteristics.
Definition of Public Company
A public company is one that is not a private company. It must have at least seven members and seven directors.
Definition of Private Company
A private company restricts the transfer of its shares, limits its members to 50 (excluding employees), and prohibits public invitations to subscribe for shares or debentures. Two or more persons holding shares jointly are treated as a single member.
Key Differences Between Private and Public Companies
1. Membership
- Private Company: Minimum of 2 members, maximum of 50 members.
- Public Company: Minimum of 7 members, no maximum limit.
2. Name
- Private Company: Uses “Private Limited” after its name.
- Public Company: Uses “Limited” after its name.
3. Commencement of Business
- Private Company: Requires a Certificate of Incorporation.
- Public Company: Requires both a Certificate of Incorporation and a Certificate of Commencement.
4. Memorandum and Articles of Association
- Private Company: Signed by at least two persons.
- Public Company: Signed by at least seven persons.
5. Tax Payment
- Private Company: Tax is paid on the whole profit.
- Public Company: Both the company and individual shareholders pay tax.
6. Statutory Meeting
- Private Company: Not required to hold a statutory meeting.
- Public Company: Compulsory to hold a statutory meeting.
7. Prospectus
- Private Company: Not required to file a prospectus or statement-in-lieu of prospectus.
- Public Company: Required to file a prospectus or statement-in-lieu of prospectus.
8. Share Transfer
- Private Company: Shares are not freely transferable.
- Public Company: Shares are freely transferable.
9. Dissolution
- Private and Public Companies: Different procedures for dissolution under the Companies Ordinance.
Winding Up a Company
Winding up, or liquidation, is the process of ending a company’s life and settling its affairs. A liquidator is appointed to manage the process.
Modes of Winding Up
1. Winding Up by the Court (Compulsory)
The court may order a company to be wound up under specific grounds, such as:
- Special resolution passed by the company for winding up.
- Oppressive conduct towards members or minority shareholders.
- Inability to pay debts.
- Unauthorized business activities.
- Failure to maintain accounts or submit statutory reports.
- Non-holding of statutory meetings.
- Failure to commence or suspension of business.
- Reduction in the number of members below the legal minimum.
- Failure to comply with court or regulatory directions.
2. Voluntary Winding Up
The company and its creditors settle their affairs without court intervention, but may seek court guidance if needed.
3. Winding Up Under Supervision of the Court
Voluntary winding up proceedings are conducted under court supervision.
Memorandum and Articles of Association
Memorandum of Association
Defines the company’s relationship with the outside world and includes:
- Company name.
- Registered office location.
- Business objectives.
- Capital structure.
- Liability of shareholders.
Articles of Association
Governs the company’s internal management and includes rules regarding:
- Appointment, powers, and duties of directors.
- Company seal.
- Meeting procedures.
- Winding up.
- Share transfer and conversion.
- Voting rights.
Key Differences
- Memorandum: Defines external powers, compulsory document, cannot be easily altered.
- Articles: Governs internal management, optional document, can be altered through a special resolution.
Partnership
A partnership is a business structure with at least two members who agree to share profits and losses.
Elements of Partnership
- Agreement between two or more persons.
- Formed to carry on a business.
- Agreement to share profits.
- Business carried on by all or any partner acting for all.
Features of Partnership
- Unlimited liability.
- No separate legal entity from its members.
- Management by all partners.
- Each partner pays tax on their share of profit.
- Mutual agency.
- Transfer of interest requires consent of other partners.
- Easy dissolution.
Rights and Duties of Partners
Partners have rights to participate in management, access accounts, share profits, and be indemnified for losses. They also have duties to act in good faith, maintain confidentiality, and contribute to the business.
Conclusion
Understanding the differences between public and private companies, the process of winding up, and the legal structures of companies and partnerships is crucial for anyone involved in business.