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What is the difference between a private and public company?

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QsId 110
Asked by Isaac Thuku
Category Personal Question
Title What is the difference between a private and public company?
 

What are the merits and demerits of a private company?
What are the merits and demerits of a public company?
What are the requirements before a company goes public?

Tags public corporation, private corporation, LLC, Limited liability company, IPO, Shares, stocks
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Heather A private corporation has a minimum of two and a maximum of fifty shareholders whereas a public corporation requires a minimum of seven and has no maximum number of shareholders.

Transfer of shares in a private corporation is restricted by an article of association whereas there is no restriction in a public corporation.

A public corporation must have a minimum of three directors and they require consent from the registrar to act as directors of the company whereas a private corporation has a minimum of two directors who require no consent.

A public corporation can issue a prospectus; inviting the public to subscribe to its shares, whereas a private corporation cannot issue a prospectus.

A public corporation requires certificate of commencement to start operations whereas a private corporation does not require one.

Merits and Demerits of a Private Company

Merits:

- Limited liability - the private assets of the shareholders are not liable to settle company debts.

- It is a different entity from the shareholders - the company can continue its operation despite the death of a shareholder.

- It is easy to start because the minimum number of shareholders required is two.

- It creates job opportunities to the public which helps to solve unemployment issues.

- A private company is not required to reveal its annual financial results to the public.
Demerits:

- Limited growth since the maximum number of shareholders is limited to fifty.

- Transfer of shares is challenging because it requires the consent of other shareholders.

- Minor shareholders are unable to cut ties with the company in fear of loss.

- Shares are not listed on the stock exchange company hence an investor lacks knowledge of the real value of his investment in the company.

Merits and Demerits Of A Public Company

Merits:

- Easy transfer of shares therefore it offers more liquidity and flexibility for the shareholders.

- There reduced chances of fraud because the company's financial results have to published to the public.

- There is access to large capital from the public.

- There is high confidence in public company from the general public because its financial results are accessible to anyone.

- It is a separate entity from its shareholders.
Demerits:

- Very difficult to establish because there are many legal formalities required.

- Management problems arise due to the huge size of public corporation.

- There is slow decision making because the board of directors has to give consent on all matters.

- There is conflict of interest from the management which can lead to exploitation of shareholders.

- The directors can easily present bogus annual reports on the performance of the company.

Requirements Before a Company Goes Public

- A private company goes public by undertaking an IPO which allows it to sell shares to the public at the stock exchange. The company must meet the basic financial and legal requirements set by the stock exchange.

- Alteration of the Articles of Association by a special resolution and the new Articles of Association has to be submitted to the registrar's office within two weeks of alteration.

- Particulars of persons who have agreed to act as directors.
A written consent of the directors.

- Statement of fact that directors have accepted and paid their qualification shares.

- A prospectus.

-A declaration from the directors or an advocate that all provisions of the company ordinance have been fulfilled.
2016-01-28

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