Key Differences Between Private and Public Companies

Every company you register in India falls into one of two broad buckets: private or public. The label is not just paperwork. It decides who can own shares, how those shares change hands, how many directors sit on the board, and where the company can go to raise money. If you are studying company law, this distinction is one of the first things you need to get right, because almost every later topic, from share capital to corporate governance, builds on it.

Where the distinction comes from 🔗

The Companies Act, 2013 defines both terms in its opening section itself. A private company is defined under Section 2(68), and a public company under Section 2(71). Interestingly, the Act does not give public companies a long list of positive features. It simply says a public company is one that is not a private company. So the real work happens in Section 2(68), where the restrictions on a private company are spelled out, and everything a public company can do follows from the absence of those restrictions.

What makes a company “private” 🔗

Under Section 2(68), a private company is one whose articles of association do three things at once.

Restriction on transfer of shares 🔗

A private company’s articles must restrict the right of members to transfer their shares. This does not mean shares can never be sold. It means the company can impose conditions, such as a right of first refusal to existing shareholders or director approval before a transfer goes through. This keeps ownership within a known, trusted circle, which is exactly why family businesses and closely held startups prefer this structure.

Cap on membership 🔗

Membership is capped at 200 people. Current employees who are also shareholders, and former employees who continued holding shares after leaving, are not counted toward this limit. Two or more people holding shares jointly count as a single member for this purpose, as clarified in various commentaries on the provision.

No invitation to the public 🔗

A private company cannot invite the general public to subscribe to its shares or debentures. If it needs fresh capital, it must raise it privately, through existing members, promoters, venture capital, or a private placement to a select group of investors.

What makes a company “public” 🔗

A public company is essentially the mirror image. It has none of the three restrictions above. Shares can be transferred freely, subject only to general regulatory compliance. There is no upper ceiling on the number of members. And the company is free to invite the public to subscribe to its securities, typically through an initial public offering (IPO) once it lists on a stock exchange.

One nuance worth remembering: even a company that is technically incorporated as private can be treated as a public company under the law. If a private company is a subsidiary of a public company, it is deemed a public company for most purposes under the Act, a rule aimed at preventing large public companies from using private subsidiaries to dodge stricter compliance. This “deemed public company” concept has drawn renewed regulatory attention in recent years.

Membership: minimum and maximum 🔗

The two structures also differ at the entry point, not just at the ceiling.

• Private company: Needs a minimum of two members to be incorporated, and can have a maximum of 200.
• Public company: Needs a minimum of seven members, and there is no maximum limit at all.

This is a logical extension of the whole scheme. A structure built around restricted, private ownership naturally caps membership. A structure built around public participation naturally has no ceiling, since the entire point is to allow wide public ownership.

Board of directors 🔗

Company law also scales up the size of the board with the scale of public involvement.

Both figures, two directors for a private company and three for a public one, come from Section 149(1) of the Act. The logic is straightforward: a public company answers to a much wider, more dispersed group of shareholders, so it needs a broader board to represent and safeguard those interests. A private company, with a small and often related group of owners, can function efficiently with a leaner board.

Raising capital: private placement versus public issue 🔗

This is where the practical consequences of the distinction really show up.

How a private company raises money 🔗

A private company cannot walk up to the general public and ask for investment. It relies on private placement, where securities are offered to a select group of identified investors, typically capped at a defined number of people in a financial year under the private placement rules. This keeps the process quicker and less regulation-heavy, but it also limits how much capital the company can realistically pull in.

How a public company raises money 🔗

A public company, especially once it decides to list, can issue a prospectus and invite subscriptions from the general investing public through an IPO. This opens access to a much larger capital base, but it comes at a cost: heavier disclosure requirements, oversight by market regulators, and ongoing obligations to keep investors informed after listing.

Why these differences matter beyond the exam 🔗

These are not arbitrary technical distinctions. They reflect a trade-off every founder eventually faces. Staying private means retaining control, avoiding public scrutiny, and keeping compliance relatively light. Going public means access to significant capital and liquidity for existing shareholders, but it also means answering to a larger, more diverse set of stakeholders and meeting a much higher bar of governance and disclosure.

This is also why so many large, well-known Indian companies started life as private companies and converted to public ones only when they were ready to raise capital from the markets. A neighbourhood manufacturing unit run by a family, or a young startup with a handful of investors, has no real need for the compliance load of a public company. A business planning a stock exchange listing, on the other hand, has no choice but to meet the public company threshold.

A quick way to remember the logic 🔗

If you are trying to recall this distinction in an exam, think of it as one underlying idea expressing itself in three ways: a private company is built to stay closed, so its rules restrict transfer, cap membership, and block public fundraising. A public company is built to stay open, so it removes all three restrictions. Once you see that single thread, the specific numbers, two versus three directors, or seven members as the minimum, become much easier to retain because they are not random figures but different expressions of the same closed-versus-open logic.

What do you think? If you were starting a business today with limited funds but strong growth ambitions, would you register it as a private company first and convert later, or would the compliance burden of a public company feel worth it from day one? And do you think the 200-member cap on private companies is still relevant in an age of large angel investor syndicates and crowdfunding platforms?

References

1. https://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17381
2. https://indiankanoon.org/doc/53167144/
3. https://taxguru.in/company-law/understanding-private-companies-companies-act-2013.html
4. https://corporate.cyrilamarchandblogs.com/2025/09/reimagining-the-regulatory-architecture-for-deemed-public-companies/
5. https://ca2013.com/149-company-to-have-board-of-directors/