People often use the word ‘company’ to describe a commercial enterprise. However, as a term, it tells us little about the kind of company under discussion. There are many types of companies, and the type of company says more about the organisation itself. If you would like information about the difference between a public and private company, this article defines these companies and how they differ.
Types of Companies
In Australia, there are numerous kinds of companies. The Corporations Act 2001 (Cth) (‘the Act’) defines and categorises them according to the liabilities of their members. There are two main categories of companies: public and proprietary (or private) companies. All companies registered under the Act are either public or proprietary.
The term ‘public company’ refers to four distinct types of companies:
- Limited by shares;
- Limited by guarantee;
- Unlimited with share capital; and
- No liability company.
A company limited by shares means that a member’s responsibility for the debts of the business only equals any unpaid share capital. Be aware that a company limited by shares can also be a proprietary company.
Conversely, a company limited by guarantee means that the liability of its members is limited to the amount of money they specified as part of their guarantee in the case the company is wound up.
The no liability company is used exclusively within the mining industry. When the entity makes a call on its shares, members must pay the balance owing on their shareholdings. However, the company cannot take action against that member for breach of contract to recover the money. If the call remains unpaid after fourteen days, the shareholder forfeits the shares to the company who then offer them for sale at a public auction. The reason a member can choose whether to pay a call is legal recognition that mining activities are extremely speculative.
An unlimited company with share capital means that if the company is wound up and its assets insufficient to pay its debts, a member must contribute to meet and shortfall. Their personal assets are thus at risk. These companies are the oldest kind still in existence and are unsuitable in a commercial context. However, some professions (like accountants) use it because the rules of their professional society prohibit limited liability. This kind of company can also be proprietary.
Private or Proprietary Companies
The term ‘proprietary company’ refers to two types of company:
- Limited by shares; and
- Unlimited with share capital.
As mentioned above, a proprietary company can be limited by shares. It can also be unlimited with share capital. The characteristics of these companies (regarding shareholders’ liabilities) remain the same in the proprietary context as in the public one.
Difference between a Public and Private Company
The main difference between a public and private company is a question about when each is suitable and what they can do. Small businesses typically use proprietary companies. One reason for this is that their financial affairs tend to remain more private. This privacy is because proprietary companies can have no more than 50 non-employee shareholders.
Another reason small businesses prefer proprietary companies is that they are subject to less regulation than public companies. For example, they need not have annual general meetings or comply with disclosure obligations regarding declarations of material personal interest on the part of directors. This makes them less costly to maintain.
However, under the Act proprietary company can be small or large. This designation has implications concerning the rules about accounting and disclosure of financial data. Understandably, large proprietary companies have more public accountability measures placed on them given that they are more economically significant entities who can potentially have a greater impact on the community.
In contrast, public companies are bigger entities. They have an unlimited membership and thus greater access to funds from the community. Public investment in these entities is a regulatory concern because it involves risk to ordinary people. Moreover, the risk increases if they are financially inexperienced.
The Act, therefore, requires the disclosure of certain information from public companies to guide and protect individuals in their investment decisions. Public companies also have greater obligations such an annual general meetings, having an auditor and disclosing financial benefits to directors. These measures are designed to improve as much as possible the inherent power imbalance between ordinary investors and large public companies.
If you are considering opening a public or private company, or have any questions about which might be more suitable, get in touch with LegalVision’s experienced lawyers. Call us on 1300 544 755.