PRIVATE -VS- PUBLIC COMPANIES

(Note: this guidance page is being re-written in view of recent law changes. Some provisions referred to may have been repealed. UKcorporator's incorporation process however remains perfectly valid and effectual.)

A private company is by far the most popular (and generally the most suitable) type of company for a small business, or private investment entity which proposes to trade as a company. A private company will also often be used as a subsidiary in a group of companies, to avoid, with respect to that member of the group, the strict requirements which are mandatory for public companies. There is one feature which is common to all private companies, namely, a private company cannot lawfully offer shares in or debentures of the company to the public, either directly or via an offer for sale - section 81 of the Companies Act 1985. (For discussion of the legal status of section 81, which has been repealed for certain purposes, see the footnote below.)

The liability of members of a private company may be limited by shares or by guarantee or it may be unlimited.

Essentially, a public company is appropriate if it is intended to raise money from the public, by the issuing of shares or debentures in the company, in order to fund the proposed business of the company. A public company must have a substantial amount of initial share capital upon registration. At present, the requirement is that a public company must have allotted shares having a nominal value of at least £50,000 and at least a quarter of them (i.e. £12,500) must be paid up - sections 11, 117 and 188(1) of the Companies Act 1985.

A private company, on the other hand, is prohibited by law from inviting members of the public to acquire its shares or debentures - section 81. Unlike a public company, a private company may become registered with only a very small amount of initial paid up share capital, for example, say, £2.

Private companies have certain advantages over public companies. These include:



1.
A private company may commence business immediately upon the certificate of incorporation issuing; a public company on the other hand needs to obtain a trading certificate from the Registrar of Companies under section 117 of the Companies Act 1985.


2.
A private company need only have one director - section 282(3) of the Companies Act 1985; a public company on the other hand must have at least two directors - section 282(1).


3.
A private company limited by shares or by guarantee (but not an unlimited one) need only have one member - the Companies (Single Member Private Limited Companies) Regulations 1992. The sole member may be the same person as the sole director. If a public company (or an unlimited company) carries on business for more than 6 months with less than two members, a member during this period may be held personally liable for company's debts - section 24 of the Companies Act 1985. Furthermore, a public (or unlimited) company may be wound up by the court if at any time the number of members is reduced below two - section 122(1)(e) of the Insolvency Act 1986.


4.
The provisions relating to the retirement of directors on reaching the age of 70 do not apply to a private company (unless the company is the subsidiary of a public company) - section 293 of the Companies Act 1985.


5.
The statutory restrictions which apply to a company making a loan, etc., to its directors apply less rigorously to a private company (unless it is the subsidiary of a public company); - section 330 and the definition of 'relevant company' in section 331(6) of the Companies Act 1985.


6.
A private company (not being a member of a group including a public company) may give financial assistance for the acquisition of its own shares, if the net assets of the company are not reduced by the acquisition or, to the extent they are reduced, if the financial assistance is provided out of distributable profits - sections 155 - 158 of the Companies Act 1985.


7.
A private company may, in certain circumstances, do by written resolution, things which would otherwise have to be done by resolution of the company in general meeting or at a class meeting - sections 381A - 382A and Schedule 15A of the Companies Act 1985.


8.
A private company may elect to dispense with the need to hold annual general meetings - section 366A of the Companies Act 1985.

On the other hand, a private company has certain disadvantages as compared to a public company. These include:



1.
A private company is prohibited from making an offer to the public (whether for cash or otherwise) of shares in or debentures of the company and also may not allot or agree to allot shares in or debentures of the company with a view to their being offered for sale to the public - section 81 of the Companies Act 1985.


2.
A private company's shares or debentures cannot be listed or dealt with at The Stock Exchange - section 143(3) of the Financial Services Act 1986.

If you have determined that you definitely wish to incorporate a company limited by guarantee or an unlimited company, then you should choose a private company formation, as all public companies are now required to have a share capital with the liability of members/shareholders being limited. (This follows from section 1(3) and section 1(4) under which, since 22 December 1980, a company may only be formed as or become a public company if it is a company limited by shares (the memorandum of which states that it is to be a public company)).

As just mentioned, the only public companies which may now be formed are public companies limited by shares; all other registered companies are private companies.

Public company limited service
In the case of a public company, UKcorporator does not presently supply articles of association, although this is proposed for a future upgrade. ('Articles of association' is the name given to the written rules governing the internal regulation of a company.) Accordingly, if you wish to form a public company using UKcorporator, you may either obtain suitable articles of association from another source or alternatively, inform Companies House that you wish to rely on 'Table A'. ('Table A' is the a standard form of 'articles of association' promulgated by Government regulation - The Companies (Tablees A to F) Regulations 1985 - and broadly suitable for companies limited by shares.) If you are forming a public company, UKcorporator will generate a specimen letter informing Companies House that you wish to adopt Table A.

Footnote on the legal status of section 81
Section 81 of the Companies Act 1985 has been repealed only for certain purposes by the Financial Services Act 1986 - section 212(3) and Part 1 of Schedule 17 and also Article 5 and Schedule 4 of the Financial Services Act 1986 (Commencement) (No.3) Order 1986. The repeal of section 81 is only to the extent to which it would otherwise (i.e. but for the repealing enactment) apply in relation to listed securities (or securities the subject of an application for listing), however, that repeal does not avail private companies in light of section 143(3) of the Financial Services Act 1986. That section prohibits applications for listing on the London Stock Exchange by private companies, with the result that no private company may make an effective offer of securities to be listed, whether to the public or otherwise.

The term 'securities' is defined broadly in the Financial Services Act 1986 - section 142(2), 142(7) and paragraphs 1, 2, 4 and 5 of Schedule 1 to the Act. It includes, for example, shares and stock in the share capital of the company, debentures, debenture stock, loan stock, bonds, warrants, options etc. Also, for the purposes of section 81 of the Companies Act 1985, the expressions 'share' and 'debenture' are given an extended meaning by section 744 of the same Act - 'debenture' includes debenture stock, bonds and any other securities of a company and 'share' means a share in the share capital of a company and generally includes stock.
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