Private and public limited companies are two distinct entities that business owners can choose from when starting up. These two kinds of companies differ in terms of ownership, structure, and even management.
In this article, we explain how both companies differ, as well as their meaning, pros and their cons.
What is a Public Limited Company?
A public limited company is an organization that can call the public to subscribe to its shares. Other responsibilities that a public limited company (PLC) must fulfil as a result of being public also exists, these include advanced management concerning taxation and public disclosure of the public company’s financial records so that potential investors can access the information needed before investing.
A public limited company may also be registered on the stock exchange. One major attribute of a public company is its freedom to offer shares to the public. A company is a public company if it states in its memorandum of association that it is public.
Read: Understanding Limited Liability Company in Nigeria
Advantages and Disadvantages of a Public Limited Company
One benefit of operating a public limited company is that it makes raising capital simple. Shares can be sold in a public offering to raise huge revenue. As a result, the issue of having enough financial resources to run the operations of the company isn’t a big deal. It also allows shareholders to have liquidity, and their shares can be easily exchanged for cash.
On the other hand, one disadvantage of public limited companies is the issue of accountability and trust with their shareholders. There are just so many people to answer to. It would always be hard for every stakeholder to agree on what would be best for the business.
What is a Private Limited Company?
A Private Limited Company is a company stated in its Memorandum of Association to be private. The basic feature of a private company is that all private companies are restricted from calling the public to subscribe to their shares. The transaction for share subscription in a private company is a more direct approach, where the shareholders would discuss in person would the interested purchaser.
Private limited companies usually add the designation “LTD” to their business name to be recognized as such.
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Advantages and Disadvantages of a Public Limited Company
The shareholders have complete control over the company because they hold all of the company’s shares. They have the option of managing the company themselves or hiring others to do so.
Despite all these benefits, there are nevertheless drawbacks to managing a private limited company. First, the difficulty in raising shares, private companies cannot call on the public to subscribe to their shares, and this occasions difficulty in trading the company’s stocks.
Differences between a Public and Private Limited Liability Company
The differences between public and private companies are numerous. These differences conceptualize the unique standards of each type of company. When registering a business you must observe the differences between the two types of company, this knowledge offers you a clear indication of what you require for the general operation of the company.
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1. The Minimum Share capital
The minimum share capital of the private and public companies differ. According to the Companies and Allied Matters Act 2020 (CAMA), the authorized minimum share capital for a private limited liability company is 100,000 Naira while the authorized minimum share capital for a public company is 2 million Naira.
The minimum share capital is the shortest amount of funds that can be contributed by the shareholders in totality for the establishment of a company.
2. The Secretary
A public company must have a secretary. The CAMA provides for a high degree of professionalism and regulates the operations, hiring and firing of a public company secretary. For instance, CAMA provides that public secretaries must either be Lawyers, chartered accountants or chartered secretaries.
Unlike the public company which has a more regulated secretary functioning base by CAMA, the private company is more flexible. CAMA provides that a private company need not have a secretary at the time of incorporation and if the private company intends to appoint a secretary, any individual can act as the secretary to a private company.
3. Restriction in the transfer of Shares
CAMA provides that all private companies must restrict the transfer of their shares in their articles. This means private companies aren’t allowed to raise capital from new shareholders without first offering the new shares to be raised to the already existing shareholders in equal proportion to the already existing shareholding.
For instance, if a private company intends to raise additional capital by issuing 200,000 shares, it must first offer the new shares to the shareholders through a pre-emptive right. If the existing shareholders refuse to purchase the new shares, the company can subsequently move on to an external buyer on the same terms and price as was offered to the shareholders.
This restriction applies even when a shareholder intends to sell all or a part of his shares. This doesn’t occur in a public company.
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4. Offering of Shares
A private company cannot call on the public to subscribe to its shares. The shares of the private company are sold directly. While at a public company, the public is called upon to subscribe to the shares of the company.
5. Maximum membership
CAMA provides maximum membership for private companies. A private company cannot have more than 50 members (shareholders) in the company. Public companies have no such limitation to the number of their members.
6. Age restriction in Director’s appointment
A person aged 70 years and above cannot be appointed as a director to the private company without issuing a pre-notice of his age before the appointment. 70 years or above director in a public company need not issue such notice.
Conclusion
There are several types of companies to choose from when starting up a business. Carefully research the pros and cons as well as the limitations of each company before undertaking registration. It is advisable for startups with small capital to register a private limited liability company, especially if the business has not shown proof of concept from its functions.
If a private company’s membership exceeds 50, the Corporate Affairs Commission would re-register the company as a public company automatically.
Read: Company Income Tax in Nigeria: Everything you need to know
