WHAT DO YOU MEAN BY PRIVATE COMPANY?

In the world of business, the term“Private Company” is frequently tossed around, especially when discussing startups, family-owned businesses, or tech giants like SpaceX. But what does it actually mean to be a private entity, and why do many of the world’s most successful founders choose to stay private?

In this article, we will break down the essentials of a private company, its benefits, and how it differs from the public giants we see on the stock market.

INTRODUCTION 

The Companies Act, 2013, classifies companies into various types based on ownership, liability, and public participation. Among these, the private company is the most common form used for family businesses, startups, and closely-held enterprises. This structure ensures limited ownership and greater control over internal management.

Statutory Definition – Section 2(68)

A private company is primarily defined under Section 2(68) of the Indian Companies Act, 2013.

This section specifically outlines the three restrictive conditions that a company must include in its Articles of Association (AOA) to be legally recognised as a “Private Company”:

1. Section 2(68)(i): It restricts the right of its members to transfer shares.
2. Section 2(68)(ii): It limits the number of its members to 200 (excluding current and former employees).
3. Section 2(68)(iii): It prohibits any invitation to the public to subscribe to any of its securities (shares or debentures).
4. Suffix: It must use the words“Private Limited”(Pvt. Ltd.) at the end of its name.

Thus, a private company is essentially a closely-held entity where ownership and control remain within a limited group.

What is a Private Company?

A private company is a business entity that is owned by a relatively small number of shareholders or company members. Unlike public companies, a private firm does not offer its shares to the general public through a stock exchange.

Ownership is kept “private,” usually held by the founders, their families, or a small group of private investors (like Venture Capitalists or Private Equity firms).

Key Characteristics of a Private Company

1. No Public Trading

The most defining feature is that you cannot buy shares of a private company on platforms like the New York Stock Exchange. Ownership is transferred through private agreements rather than open market trades.

2. Limited Number of Shareholders

Most jurisdictions place a legal limit on how many people can own a piece of a private company. For example, in many countries, this limit is capped at 200 shareholders.

3. Financial Privacy

Unlike public companies (which must publish detailed quarterly financial reports), private companies are not required to disclose their profits, losses, or executive salaries to the general public. This allows them to keep their competitive strategies a secret.

4. Limited Liability

Most private companies are incorporated as “Private Limited” (Pvt. Ltd) or LLCs. This protects the owners’ personal assets. If the company faces a lawsuit or debt, the owners are only liable for the amount they invested in the business.

Private vs. Public: What’s the Difference?

Why Do Companies Choose to Stay Private?

Many massive corporations, such as Cargill, Mars (the candy maker), and IKEA, have chosen to remain private for decades. Here is why:

• Long-Term Vision: Public companies are often pressured by shareholders to show profits every 3 months. Private companies can focus on long-term goals without worrying about daily stock price fluctuations.
• Total Control: Founders can make quick decisions without needing approval from thousands of external shareholders.
• Lower Costs: Staying private saves the company millions of dollars in legal, auditing, and reporting fees required for public listing.

The Bottom Line

A private company is the backbone of the global economy. It offers a perfect balance of legal protection, operational privacy, and founder control. Whether it is a small local bakery or a multi-billion-dollar aerospace firm, the private structure allows a business to grow on its own terms. As a company scales, it may eventually decide to go through an Initial Public Offering (IPO) to raise massive amounts of capital, but for many, the “private” path is the key to sustained success.