What is a private company vs a public company?

Have you ever seen ‘Pty’ at the end of a company’s name and wondered what it meant? Well, you’ve come to the right place. Those three little letters signal that the company is a private company. Business Kitz have devised this blog to explain what that actually means.

What is a private company?

A private company (also referred to as a proprietary company), is a business structure in which the firm is held under private ownership. In Australia, this is the most common type of business structure, as ASIC cites private companies to be representative of 99% of Australian businesses. They may issue stock and have shareholders, but their shares are not traded on public exchanges. Instead, its stock is offered, owned, or exchanged privately among a small number of shareholders. This is advantageous as the companies don’t have to abide by the requests of hundreds of stockholders, and are not required to fulfil the same number of disclosure obligations as public companies.

Companies may begin as private, but then convert to a public company when growth is imminent and they wish to raise capital. However, the limited number of shareholders does not limit the size of the company.

What is involved in a private company?

All private companies are regulated by ASIC. To be certified as a private company, the following requirements must be satisfied:

  • The company must have share capital;
  • The company must have at least one member/shareholder;
  • Are limited to a maximum of 50 non-employee shareholders; and
  • The company must have at least one director.

What are the types of private companies?

How private companies are categorised largely hinges upon relevant levels of liability:

1. Proprietary companies limited by shares (Pty Ltd)

When we see the abbreviation of ‘Pty Ltd’, this signals that the company is ‘proprietary limited’. This means that shareholders’ liability and legal responsibility over a company’s debts is contingent on the number of shares they own. This becomes relevant if the company becomes insolvent, in which share holders only risk losing the money they used to initially purchase their shares.

This structure is common for small to medium sized businesses. However, some familiar names of the biggest Proprietary Limited companies in Australia include 7-Eleven, Meriton, Hutchinson Builders and Cotton On group.

2. Unlimited proprietary companies with a share capital (Pty)

Conversely, when companies just show ‘Pty’ in their title, shareholders may be completely liable for the debts of the company, despite having fully paid for their shares. This means the company has share capital and shareholder lability is not limited.

What are the key differences between private and public companies?

The key difference is that private companies are not open to investment by the general public, whilst public companies are. Although being open to investment by the public makes it easier to raise capital, it also prompts intense levels of regulation and compliance to protect potential investors and the public. Below are six main differences between private and public companies:

1. Structural

For private companies, there is a limit of 50 shareholders who are not employees of the company. There must be a minimum of one director and a company secretary is optional. A registered office is a prerequisite but does not have to be available to the public. Public companies have no limit to the number of shareholders and there must be a minimum of three directors, at least two of whom reside in Australia. There is required to be a minimum of one company secretary and the registered office must be accessible to the public.

2. Public Fundraising

Public companies are able to raise funds from the general public by distributing shares, unlike private companies who have private investors instead. Public companies offering shares to the general public must provide a disclosure document to potential investors.

3. Reporting Obligations

Private companies are only required to prepare a financial report and a directors’ report if they are a large private company (consolidated revenue is 425 million or more, gross asset value is $12.5 million or more, and have 50 or more employees). All public companies must prepare these reports and have them independently audited.

4. Regulations

A private company has less extensive regulations that need compliance compared to public companies. They also are allowed to have only one director as opposed to public companies which require three.

5. Ownership

Private companies allow owners to make decisions regarding who is able to acquire shares. This is not the case with public companies whose shares are for sale on the stock exchange.

6. Cost

Going through an IPO and maintaining a public company is an expensive process. Particularly if the business is still relatively new or developing, it usually often is not worth the expense to make a business public.

Legal advice

There are key benefits to being a privately owned company. Ultimately, they are easier to manage, less costly and allow more control over the direction one may wish to take their business. If you require further advice, our sister company, Legal Kitz can assist with ensuring that your matter is as time and cost efficient as possible. We provide a FREE 30-minute consultation to set you in the right legal direction. Click here to book a FREE consultation with one of our highly experienced solicitors today or contact us by calling 1300 988 954.

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