Whether you’re someone wanting to start their own company or you are a company owner, knowing the difference between various company types is a good first step in establishing the company structure that’s right for you and your company.
Why is it important to choose your business structure wisely? Well choosing the right structure will impact your:
- Legal risks
- Operational requirements
- Asset protection
- Tax obligations
- Legal costs
- Growth and development opportunities
Knowing the ins and outs i.e differences between a public and a private company may seem like a challenge and that’s why we are here to help you make the right decision.
Now, let’s dive into the details.
What is a company in Australia?
An Australian company is a type of business structure that is a separate legal entity from its owners. This means that its legal status gives a company the same rights as a person, which means that a company can incur debts, sue and be sued. To summarise, some features are:
- They are a separate legal entity
- Perpetual succession
- Possible limited liability
- Flexibility about raising capital and financing
- Tax advantages
- High costs and regulatory burdens
Okay, now that we’ve got that out of the way, we can delve into the key differences between a public company and a private (or proprietary) company.
What is a public company?
Often referred to as a publicly-traded company, a public company is a corporation that is open to investment by the public via an initial public offering (IPO).
In other words, public companies can be listed on the Australian Securities Exchange (ASX), and with this power comes great responsibility.
This means that a public company can raise funds by making offers or invitations to the public to purchase through the ASX or subscribe for securities to enhance the marketability of its securities.
If you’re looking to start a public company, the following factors would be good to know:
- A public company must have at least 1 member; unlike a proprietary company where there is no statutory maximum
- A public company must have at least 3 directors
- Public companies can raise money from the public, whereas private companies can’t
- Public companies must appoint each director by a separate resolution unless there is a unanimous agreement to a single resolution
Other key considerations from a taxation perspective involving public companies include:
- Shares are listed on the stock exchange anywhere in the world
- A company is cooperative. A cooperative is a member-owned business structure with at least five members, all of whom have equal voting rights regardless of their level of involvement or investment.
- The company is a mutual life assurance company
- The company is a friendly society dispensary
- The company is a registered organisation
- The company is a public purpose body constituted by a law of Australia
- The company is a subsidiary of a public company
Now that you have a good understanding of a public company, let’s move on to a private company.
What is a private (or proprietary) company?
In Australia, under the Corporations Act 2001 (Corporations Act), a private company must consist of the following elements:
- Must have shared capital under s 112(1) of the Corporations Act
- Have at least 1 member but cannot have more than 50 non-employee shareholders as members under s 113
- Have at least 1 director under s 201A(1)
- Not engage in any activity that would activate the operation of fundraising provisions in chapter 6D of the Corporations Act
- Include the words Pty limited or the abbreviation Pty Ltd at the end of its name under s 148(2) of the Corporations Act
Do you want to be a large or small private company?
Did you know that private companies are divided further into large companies or small private companies within the private category? Yes, that’s right.
This distinction was made so that smaller companies wouldn’t have to meet the same financial reporting requirements as big companies.
Unsure whether you’re a big or small private company? Not to worry, we have defined the differences below.
As a large private company, you need to satisfy 2 of the following 3 criteria for each financial year under s 45A(3) of the Corporations Act:
- Have a consolidated revenue of $50 million or more
- The value of the consolidated gross assets is $25 million or more
- Have at least 100 employees
A small private company is defined as a company that for in a financial year falls below any of the 2 of the 3 criteria under section 45A(2) of the Corporations Act:
- The company has less than $25 million consolidated operation revenue
- The company has less than $12.5 million consolidated gross assets
- The company has fewer than 50 employees
Other key differences between a small and large company are:
- A small company does not have to prepare a financial report in the director’s report for a financial year unless direction is given by ASIC or requested by 5% of votes
- Where directed to prepare a financial report, the report doesn’t have to be audited unless shareholders with at least 5% of the votes have required an audit
What is the difference between limited and unlimited?
One last important characteristic of private companies is that there are two types of private companies, limited proprietary companies (‘Pty Ltd’ is usually placed after the company name) and unlimited proprietary companies (‘Pty’ is placed after the company name).
Let us explain this for you.
A limited proprietary company means shares limit the company. This means that the personal liability of each shareholder is limited to the amount they have agreed to pay for the shares.
On the other hand, an unlimited proprietary company means there is no limit on the personal liability of the shareholders. However, this means that shareholders could be liable for the company’s debts. Including if they have completely paid for their portion of shares.
Advantages and disadvantages of public and private companies
Public company
Advantages
- Being that a public company is open to investment, it is quite easy to raise capital.
- Undertake new projects, new research and new company developments
- Engaging in acquisitions
- Minimise the risk of debts resulting in insolvency
Disadvantages
- As public companies are big companies and trade on the open market, they are required to answer to their shareholders
- There is a high level of regulation and compliance
- Preparing director’s reports and financial reports can be time-consuming and costly to produce
- Going through an IPO and maintaining a public company is an expensive process
Private company
Advantages
- There is no need for private companies to answer to stockholders. This simplifies decision-making and streamlines communication
- It is possible to pursue long term projects with a private company without worrying about falling stock prices
- A private company has less extensive regulations that you need to comply with than public companies
Disadvantages
- Private companies cannot access public capital markets and must rely on private funding
- As private companies get their cash from private equity companies, private investors tend to be more involved
- the financial and managerial resources of a private company are limited
- Since a private company’s affairs are unknown and it is not subject to strict regulation, the public has little confidence in it
Key differences between a public and private company
Now that you understand what a public and private company is, let’s go through the main differences.
1. Shareholder and structural differences between public and private company
The shareholder and structural differences between a public and private company are that in a private company, there:
- Is a limit of 50 shareholders who are not employees of the company
- Must be a minimum number of 1 director
- A company secretary is optional
- A registered office is still a prerequisite, but it doesn’t have to be accessible to the public
The difference between public companies is that there:
- Is no limit to the number of shareholders you can have
- The minimum number of directors is 3 directors, 2 that must reside in Australia
- Must have 1 company secretary
- Needs to be a registered office accessible to the public
2. Public fundraising in public and private companies
Fundraising involves a company seeking capital by entering into a direct relationship with investors by offering them the opportunity to buy the company’s securities. This is called a primary offering of securities.
Public companies may raise money from the general public through the sale of shares, while private companies might have private investors.
Public companies must supply prospective investors with disclosure documents (such as prospectuses).
Unlike a public company, a private entity must meet certain exemptions from disclosure requirements before raising public capital and selling stocks or bonds on the public market.
Companies that break this rule can be forced to become public companies by ASIC.
A private company can also issue shares to an existing shareholder or employee without undergoing the disclosure process. Another exception, which is growing in popularity, is crowdsourced funding. In this case, the company raises capital through a hosting platform.
In the same way, private companies must also meet specific requirements such as meeting a $10,000 investor cap per year and preparing an offer document.
3. Reporting obligations for public and private companies
Under the Corporations Act, both private and public companies have specific responsibilities that they need to comply with to remain legally compliant.
What are they, you ask? Let’s go through it.
Public companies must prepare both a directors report and a financial report annually. These reports also need to be independently audited, which can be time-consuming and costly.
If you’re considering having a public company, this would be something to think about.
On the other hand, a private company is generally off the hook, and they do not need to prepare the directors report and financial reports annually. The only exception here is that a private company is a large proprietary company.
Suppose you invested in a public company. In that case, you will have received a copy of its constitution, financial statements, directors reports, and its financial and directors reports. It is a requirement that public companies disclose this information to their shareholders.
Besides this, public companies need to conduct annual general meetings and maintain a share register. To summarise, a public company needs to disclose the following information:
- Disclose to members
- Minute books – s 251A
- Financial records – s 9 and s 286
- Financial reports – s 341
- Company registers – s 172
- Auditor’s report
- Disclosure to the public (creditors, potential investors)
- Financial reporting
- Directors’ reporting and declarations
- Auditor’s report
If a public company fails to comply with these provisions, it could face penalties under s 344 of the Corporations Act.
A key difference between a proprietary company is that they don’t need to disclose the same information. This would be another thing to think about if you want to start a company.
4. Prospectus requirements for a public and private company
If you are or want to operate a public company, under s 710 of the Corporations Act, you will need to release a prospectus to shareholders.
A prospectus is a statement about the future of your business and requires you to detail the following information:
- Company’s financial risks
- Profits
- Losses
- Assets
- Liabilities
- Business model
- Other information
The purpose of a publication of a prospectus is to ensure that investors are provided with sufficient information to enable them to make an informed decision regarding their initial investments in your company.
On the other hand, private companies can’t raise funds that would require a prospectus and don’t need to release a prospectus. But the disadvantage of this is that private companies are then limited when wanting to raise capital.
But as was mentioned before, the law has allowed private companies to source funds through crowdfunding.
5. Removal of directors in a public and private company
The removal of directors in a public and private company varies quite a bit.
In a public company, if shareholders want to remove a director, under s 203D of the Corporations Act, they must provide their notice of intention in writing to remove a director.
However, the only way for this to be valid is if the shareholders give the company at least 2 months notice before the meeting is held under s 203D(2).
The director is then entitled to put their case to the members. This can be done through a written statement which the company must circulate, or by speaking to the resolution at the meeting under s 203D(4).
One important point to note is that if you are a director of an existing public company, you do not have the power to remove another director.
In a proprietary company, the removal of a director is done according to the company’s constitution. This is done by resolution, by a majority vote or in a specific way outlined by the constitution.
Suppose your company doesn’t have a constitution. In that case, the replaceable rule in s 203C (which only applies to private companies) gives the power to remove a director to members in the general meeting.
This will be done by passing a resolution (s 9). To pass the resolution:
- More than 50% of the shareholders must favour the removal
- The number of the people who are present voting at a particular meeting
If the removal of a director is done this way, you need to consider their employment terms to ensure they are not being unfairly dismissed.
After removing a director from your company, you will need to notify ASIC within 28 days by making changes on their website. You can only do this if you are an officeholder.
6. Dividends in a public and private company
Before we get into the difference between dividends in public and private companies, a dividend is a share of the company’s profits paid to a shareholder.
In a public company, every share in a class of shares must have the same dividend rights unless otherwise provided for in the company’s constitution or by special resolution.
If your company chooses to make a dividend distribution, each share in each class of shares will have the same right to receive it.
In public companies, the payment of dividends attracts investors to purchase shares in the company, which assists in maintaining or increasing the company’s share price. This is one significant advantage of providing dividends.
Unlike public companies, directors of private companies have the right to distribute dividends to anyone they like.
7. Resignation of auditors in a public and private company
Public company auditors play a significant role in ensuring auditor independence and quality.
However, if a public company wishes to remove an auditor, this can only be done through a resolution at the general meeting with ASIC’s consent. ASIC will consent to the resignation if:
- Their criteria for consent is met
- All relevant supporting information is provided with the application
- Appropriate disclosure is made to ASIC and the market
In private companies, removing an auditor doesn’t require the approval of ASIC.
8. Related party transaction provisions in a public and private company
Suppose a public company wishes to transact in a way that gives a financial benefit to a related party. In this case, according to section 208(1) of the Corporations Act, it must be approved by the members in the general meeting.
Creating a relationship with a family shareholder or signing a contract with a company owned by a director’s family could be examples of a related party transaction.
The requirement does not apply to directors of private companies.
9. Directors participating in votes on material personal interest
The Corporations Act does not directly prohibit a director from placing themselves in a position of conflict.
Instead, the Corporations Act requires directors to make appropriate disclosure of material personal interests about the company’s affairs.
As such, directors of private companies may participate in such votes as long as they:
- Have care and diligence
- Act in good faith in the best interests of the company
- Not improperly use their position or information to gain an advantage
- Disclose the nature and extent of the interest
Similarly, unless the other directors or ASIC approve, directors of public companies should not take part in votes on matters they have significant personal interests.
10. Passing circulating resolutions in a public and private company
A circulating resolution is a written document setting out the resolutions (decisions) that your company needs to pass or approve without a general meeting.
Unless the company constitution explicitly allows it, public companies may not pass circulating resolutions of shareholders.
Shareholders and directors of private companies may pass circulating resolutions, provided they receive the proposed resolution and agree to it.
Under the Corporations Act, the following requirements need to be met:
- Any information or documentation related to the proposed resolution should be provided to all members
- A document relating to the proposed resolution is to be given to all members for signature
- Documentation is completed by all members of the private company
- To pass the circulating resolution, all members of the private company have to agree to it
- If each member receives separate documentation, the documentation must be identical
- The proposed resolution will only become effective when the last member of the private company signs the document
11. Proxy vote appointment in a public and private company
Under s 249X(1) of the Corporations Act, a replaceable rule for private companies and a mandatory rule for public companies provides that any member of a company entitled to vote at a general meeting may appoint a proxy to attend the meeting and vote on their behalf.
For public companies, this means that they’re required to allow shareholders with voting rights to attend meetings and vote on their behalf if they are unable to attend.
If a private company doesn’t wish to permit proxy appointments, its constitution can prohibit it from happening.
12. Registering share transfers in a public and private company
A private company’s directors can refuse to register a transfer of shares if the company constitution permits it.
In the constitution of public companies, directors may have this power. Public companies, however, are generally not required to have such restrictions if they are listed on a stock exchange. This rule can be disregarded only if the stock exchange’s rules allow it.
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Summary of the differences between a public and private company
1. Shareholder and structural differences
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2. Public fundraising
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3. Reporting obligations
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4. Prospectus requirements
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5. Removal of directors
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6. Dividends
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7. Resignation of auditors
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8. Related party transaction provisions
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9. Directors participating in votes on material personal interest
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10. Passing circulating resolutions
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11. Proxy vote appointment
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12. Registering share transfers
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13. Valuation
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14. Share capital
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Conclusion
There’s no denying that there are many key differences and some similarities between a public and a private company.
Whether you are someone who wishes to have their own company or you currently have a private or public company, understanding the differences between them is essential to your business goals.
Private companies often go public and become public companies when they reach a certain number of shareholders and wish to grow.
However, whether you’re considering switching or want to set up a private or public company, why not hire a lawyer to help? As always Lawpath can help you find the best lawyers at the most affordable cost.
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