What Is a Private Company: Definition, Types and Advantages

A private company is a business owned by private individuals or entities, regulated under the Companies Act 2013. It means that neither the shares of it are available to the general public nor are they listed on stock exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). These businesses have fewer compliance and disclosure requirements and offer more control and confidentiality. However, it may limit the options for raising a large amount of capital (funds) for business growth and expansion.

Most companies choose to remain private to keep the ownership within the family and avoid the high costs and strict rules of being a public company. Along with all these benefits, there are some disadvantages also, like there are possibilities of disputes between owners/partners, has limited liquidity as the shares cannot be sold easily. In India, a private company can range from small startups to even a large firm. Some common forms of private businesses in India include sole proprietorship, partnership firms, limited liability partnerships, and commonly used private limited companies (Pvt. Ltd).

Additionally, private companies can raise substantial funds from investors by going public. Before doing so, they must select an underwriter to serve as an intermediary between the company and the public investors and to guide the company through the IPO process. Keep reading further to know more about a private company in India.

What are the Types of Private Companies?

A private company can have various ownership structures and can be owned by an individual, family, another private company, etc. It can have several structures in India, which are as follows:

• Sole Proprietorship: It is when a single individual owns and runs the business, meaning the owner and the business are the same. The owner gets complete control over the company and is also responsible for all debts and obligations. The profits earned from a sole proprietorship are taxed as the owner's personal income. 
• Partnership Firm: It is made up of two or more individuals who agree to share profits. It is formed under the Indian Partnership Act, 1932. The partners share unlimited liability, meaning they are equally liable to pay off the firm's debts. 
• Limited Liability Partnership: An LLP offers the flexibility of a partnership but with limited liability protection. It is governed by the LLP Act 2008, where the partners are responsible for paying the debt only up to the contribution they have agreed upon. It helps them protect their personal assets from business debts. 
• Private Limited Company (Pvt Ltd): It is the most common corporate structure for private businesses in India and can have a minimum of 2 and a maximum of 200 shareholders.mon corporate structure for private businesses in India, and can have a minimum of 2 and a maximum of 200 shareholders. These are separate legal entities from its sharedholders, having limited liability to the value of their shares. It is regulated by the Companies Act, 2013. The shares of a Pvt. Ltd. cannot be offered to the public. 

Why Do Companies Opt to Remain Private?

Here are two key reasons why private companies choose to remain private over public:

To Hold Ownership Within the Family 

One common reason why companies choose to remain private is to keep ownership within the family. For example, a lot of large companies in the U.S are owned by families and passed down through generations. A public company is responsible for answering a large number of shareholders, and perhaps has to appoint board members who aren't a part of the founding family.

Conversely, private companies have complete control over who holds a seat on the board of directors. Additionally, they are only answerable to a small group of shareholders or private investors. Instead of selling shares to the public through an IPO (Initial Public Offering), private companies fund their own projects and investments. 

To Prevent Government and Regulatory Inspections

Unlike public companies that need to share their financial information with the public by filing quarterly and annual reports, private companies have the freedom to keep their financial and operational information private. It helps them prevent the strict regulations and government supervision that public companies need to follow. 

Private companies legally don't need to make their financial statements public. However, they are required to maintain proper accounting records and provide financial statements to their shareholders. 

What are the Pros and Cons of a Private Company?

Several businesses choose to remain private to prevent the high costs and strict rules of being a publicly listed company. Staying private helps a company save on IPO expenses, keep its business strategies and financial information safe from competitors, and avoid complex compliance requirements. 

However, it can be hard for private companies to raise large amounts of capital without having access to public stock markets. The growth mainly depends on internal profits, bank loans, or private investors, who may demand equity or control. Also, owners may face unlimited personal liability in structures like partnerships and sole proprietorships. In case of financial issues, their personal assets may be used to cover debts, which may significantly affect their personal financial liability. 

What are the Features of a Private Company?

A private company is a privately owned business with features varying from those of a public company. Here are some key features of a private company:

• Using 'Private Limited': Private companies are legally required to add 'Private Limited' to their name. 
• Limited Liability: Shareholders are responsible for paying off only the amount that they have invested. 
• Fewer Rules: Unlike public companies, private companies have lighter compliance and disclosure requirements. 
• No Public Offering: The company cannot offer shares or debentures to the general public. 
• Perpetual Existence: The company will still continue regardless of a change in the ownership or the shareholder's status. 
• Share Transfer Restrictions: Shares cannot be sold freely in the public market, and transfers from other shareholders usually require approval.

What is the Formation Process of Private Companies?

A private company's incorporation process has been made easier via the MCA portal. It mainly uses a single integrated form, which is SPICe+ (Simplified Proforma for Incorporating Company electronically). Follow the steps below to register a private company in India:

Step 1: Obtain a Digital Signature Certificate (DSC) and Director Identification Number (DIN)
Before filing any forms online, all proposed directors need to obtain a DSC, which is just like a physical signature but in electronic form. Also, you need to apply for a DIN, which is a unique identification number assigned to each director.

Step 2: Name Approval Process
You need to reserve a name for your company by filing part A of the SPICe+ form on the MCA portal. You are allowed to submit up to two names for consideration. After a name is approved, it will be reserved for 20 days, during which you must complete the incorporation process.

Step 3: File Incorporation Documents
Once the name is approved, you need to complete Part B of the SPICe+ form. This detailed form combines applications for company incorporation, PAN, TAN, GSTIN, opening a bank account, and DIN allotment. Here are the main documents you need to attach:
• Proof of office address: Utility bills or rental agreement for the registered office.
• Declarations: Consent and declarations from the first directors and shareholders.
• Memorandum of Associations (MoA):  It reflects the company's objectives and operational scope.
• Articles of Association (AoA): It outlines the internal rules and regulations for managing the company.

Step 4: Obtain the Certificate of Incorporation (COI)
You will recieve a Certificate of Incorporation after the Registrar of Companies (RoC) verifies all your documents. It is like the official birth certificate of your company that includes the corporate identity number (CIN). Additionally, the PAN and TAN of your company are also allotted during this stage.

What is the Average Size of a Private Company?

The average size of a private company may vary based on the industry and location. Private companies in India may range from small startups with some employees to even a large firm with hundreds of employees.

Generally, as compared to large public companies, small to medium-sized private companies may have fewer than 200 employees and may generate average income. A private company's size often reflects its operational scale, market focus, and growth stage. 

What is the Difference Between Private and Public Companies?

The table below lists the differences between a private and a public company:

The Shift From a Private Company to a Public Company 

Most of the public companies start their journey as private entities, like partnerships, family-owned businesses, or limited liability companies with a small group of shareholders and advisors. When the business grows, it often requires a significant amount to finance its operations, expand, or acquire smaller companies. 

This funding usually requires more funds than what the company can generate from its own revenue or its close investor circle. To fulfill these financial needs, many companies decide to transition from a private company to a public company. After this transition, the company will be required to sell its shares to the public via a process called IPO (Initial Public Offering). Going public helps the company to have access to a large amount of funds from investors in the stock market. These funds can be used for the company's growth and expansion. 

The company needs to choose an underwriter, typically an investment bank, before going public. The underwriter will play a crucial role in guiding the company through the IPO process by acting as an intermediary between the company and the public investors. They ensure that the company adheres to all the government rules and carry out proper verifications (due diligence) to ensure the process is legal and transparent. 

The company's privately-held shares are converted into publicly traded shares when the company goes public. The share's value is determined by the market, depending on supply and demand. Before the company went public, the shareholders who owned the company could choose whether to hold or sell their shares to new investors. 

They can make a profit if they decide to sell the shares because the shares' public trading price could be higher than what they originally paid to acquire them. In short, going public allows a company to raise a significant amount of funds, but it also needs careful planning and compliance with regulatory requirements. Going public can be a good option to raise funds for further growth. However, it also comes with a lot of new responsibilities because the company is now responsible for answering a huge number of public shareholders. 

The Bottom Line

Private companies offer more control, flexibility, and confidentiality to the owners. It offers limited liability protection, separate personal assets from business risks, and even offers higher credibility. Although staying private allows companies to focus on long-term growth and independence, it can also limit liquidity and funding opportunities.

If you are also looking to establish a private company in India as an NRI and need guidance with the same, Savetaxs is your trusted partner. We have an entire team of experts who can provide end-to-end support on the complex, legal, and regulatory requirements of incorporating a private limited company in India. They will also help you ensure that everything is accurate and completed to ensure a smooth process. Connect with us right away as we are serving our clients 24/7 across all time zones.