Recently I have been contacted and asked to answer a few
questions. Rather than just replying to the individual, I thought it would help
a lot of people out if I answered them here. So over the next few weeks I will
be doing just that. (Please email illuminatingfinance@gmail.com
if you have a question you would like answered.)
“What is the difference between a private and public corporation?”
I like this question because it really forces us to get back
to basics. Before we can determine the difference between a public and private
company we must first understand the difference between the types of firms.
There are three types of firms; the sole trader, the partnership, and
corporations.
The Sole trader:
A sole trader is a business owned and run by one person.
Sole traders are very easy to set up and are the most common type of firm in
the world. The disadvantage of a sole trader is that there is no separation
between the firm and the owner. This means the owner has unlimited personal
liability to any debtors (if the business defaults on any loans, the lender
will repay the loan using personal assets – ie a car or house).
The Partnership:
A partnership is a business owned and run by more than one
owner. In this case all partners are liable for the firm’s debt. Thus both
parties have unlimited personal liability to lenders (see above). Partnerships
can be set up in a variety of ways, but often end at the death or withdrawal of
one of the partners. Limited liability partnerships can also be created to
limit the owner’s liability only to the investment in the firm.
The Corporation
A corporation is a legally defined, artificial being (a
legal entity), separate from its owners. It is solely responsible for any
liabilities or defaults it occurs (the owners personal assets will not be in jeopardy,
even in default).
So in the question we are discussing a firm where the owners
have limited liability for the firms debts. The second part we need to discuss
is the difference between a private and public corporation.
Private companies
A private company has restrictions on
the number of non-employee shareholders (a maximum of 50), an are not required
to appoint an auditor. To buy or sell shares, the investor must contact the
company itself or buy them off a specific individual who already owns shares.
Public companies
Public companies can have an unlimited
number of shareholders and are required to follow many regulations specified by
the Australian Securities and Investments Commission (ASIC), including proper disclosure,
and lodging audited financial accounts. Public companies are listed on the
stock exchange and can be traded through that marketplace, so an investor does
not have to contact shareholders individually.
Putting these two things together, we get a firm where
owners have limited liability (up to the amount invested in the company) and
are publically listed on a stock exchange.
I hope this helps!
