Corporate personality is the creation of law.

And as per the law, a corporation is an

artificial person created by the personification of a group of individuals. The theory
of corporate personality mainly states that a company has a legal identity different
from its member. Both English and Indian laws follow the concept of corporate
personality.

The creditors of the company can recover their money only from the company and
they cannot sue individual members. In the same way, the company is not in any
way liable for the individual debts of its shareholders/members and the property of
the company is only used for the benefit of the company.

It enjoys certain rights and duties such as the right to hold property, right to enter
into contracts, to sue and be sued in the name of the company. The rights and
liabilities of the members are different from the company.

In short, corporate/legal personality, which the company acquires on incorporation,

confers legal personality and independent status to the company.

There are two types of corporations:

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For the first time, this concept was recognized in the year 1867 in the case of Oakes
v. Turquand and Harding. But it was approved and firmly established in the leading
case of Salomon vs. Salomon in which it was held that a company has its own
personality which is different from the personalities of the individuals.

CASE STUDY: Salomon v A Salomon & Co Ltd [1897] AC 22

FACTS:

1. Mr. Aron Salomon was a businessman who specialized in manufacturing

leather boots. After a few years, he incorporated a limited company known as
Salomon and Co. Ltd.
2. In order to meet the requirement to incorporate a company, he needed at least
seven members/ shareholders so he decided to make his family members his
business partners by giving one share to each of them.
3. He sold his business to the limited company for $39000 out of which $10000
was a debt to him. He was then the company’s principal shareholder and
principal creditor.
4. After one year, the company went into liquidation. The assets realized were
$6000 while the liability was debentures held by Salomon $10000 and
unsecured creditor $7000.

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 5. An unsecured creditor challenged the right of Salomon to have preference as
debenture holder over unsecured creditors.

ISSUE:

Was the formation of Salomon’s company a fraud intended to defraud the creditors?

HELD:

The court said that on incorporation, the company became an independent legal
person and not an agent of Salomon. Salomon, as a debenture holder of the
company was ought to get priority in payment over the unsecured creditor.

IMPORTANCE OF THIS JUDGEMENT:

The decision in this case established the concept of separate legal personality of a
company which allowed shareholders to carry on trading with minimal exposure to
the risk of personal insolvency in the event of a collapse. There are 2 principles laid
down in the Salomon’s case:

1. Artificial Person: Company is an artificial person created by law. Artificial in

the sense, it has no body/soul like a natural person. Created by law means
formation of a company requires fulfilment of so many legal formalities.
2. Limited Liability: The liability of the members is limited to the extent of the
face value of the shares, where the company is limited by shares. Then, the
shareholder is liable to the extent of the unpaid capital on his shares and his
personal assets will not be affected in the event of winding up of the company.

CASE STUDY: Lee v. Lee’s Air Farming Ltd. (1961) AC 12

FACTS:

1. This case is concerning about the veil of incorporation and separate legal
personality. In this case out of the 3000 shares in Lee’s Air Farming Ltd., L
held 2999 shares. He made himself the Managing Director and was also the
chief pilot on a salary.

2. While working for the company he was killed in an air crash. Since his death
was in the course of employment, his widow claimed for compensation. She
claimed £2,430 compensation for herself and her four infant children and
she also claimed a sum for funeral expenses.

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 3. The respondent company denied that deceased was a “worker” of the company
and alleged that at the time of the accident the deceased was the controlling
shareholder and governing director of the respondent company.

ISSUE:

Was there a separate legal entity? Whether Mrs. Lee can claim compensation?

HELD:

The Lee Air Farming case confirmed the Salomon principal. The Privy Council
allowed Mrs Lee’s claim and said that Lee might have been the controller of the
company in fact but in law, they were separate distinct persons and the concept of
separate legal entity was explained. Mr. Lee could therefore enter into a contract
with the company, and could be considered to be an employee. His wife was
therefore entitled to an award in respect of workmen’s compensation.

Judicial Committee of the Privy Council also said that a company is a separate legal
entity, so that a director could still be under a contract of employment with the
company he solely owned.

Advantages and disadvantages of incorporation Advantages of

incorporation

The following are the advantages of incorporation they are:-

1.Independent corporate existence;
2.Limited liability;
3.Perpetual succession;
4.Transferable shares;
5.Capacity to sue and be sued; and
6.Accumulation of large capital.

1. Independent corporate existence;

The company is juristic person. It has separate legal entity. The company is an
association of persons formed for the purpose of some business or undertaking
carried on the name of association. But at the same time it has its own independent
corporate existence, which is called corporate personality. It is also known as rule of
“Salomon vs. Salomon”. It is formed with the members and at the same time it is
independent of its members. It is corporate aggregate; it functions like a corporate
sole. The company is at law a different person altogether from its members. This is
also called as the veil of corporation the theory of corporate personality entity is
indeed, the basic principle on which the whole law of corporation is based. The
theory which explains about the corporate personality is known as organic theory.

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Organic theory: - the human body is composed with several organs with a brain to
think and other parts to think and other parts to functions. Similarly the company
also functions. It is called organic theory. Denning L J. explains organic theory in
the following words: a company shall have a residence registered office. It has a
purpose and business motto. The civil and criminal liabilities are imposed upon the
company, when it acts ultra vires. But certain criminal offences, viz. murder, etc.,
where the “mens rea” acts and a mandatory period of imprisonment or punishment
to death, are mentioned, the corporate liability is clearly excluded. In the cases, viz.
breach of trust, forgery, defamation, etc. the criminal liability is imposed upon the
company under organic theory this theory also accepts respondent superior in case
of torts and civil liabilities. This theory recognized that the board of directors is not
a mere agent of the company but an organic part of it so that third parties can treat
acts of the board as acts of the company itself.

Salomon vs. Salomon & co. ltd. (1897 AC 22)

It is the leading case showing independent corporate existence.
Brief facts: Salomon was a boot and shoe manufacture and had a good reputation
and profitability too. He formed “Salomon & co. Ltd”, with the share capital of
30,000/- pounds. His wife, one daughter and four sons and he, totally 7 members,
were the subscribers to the company. Each share was @1 pound. Salomon paid his
share amount. He also paid 10,000/- pounds towards debentures in the company.
After some years the company was in loss, and was winded up. At the time of
winding up, the company had left property worth 6,000/- pounds, and the liabilities
were 17,000/- pounds (10,000/- pounds towards debentures of Salomon and
7,000/- pounds towards due to unsecured creditors =totally 17,000 ponds).
Unsecured creditors claimed their importance over the property of 6,000 pounds.
Salomon also claimed that he had charge over the company and he was a secured
creditor, being he was the holder of debentures worth of 10,000/- pounds, which
created a charge over the company. The created by Salomon and his family
members and in fact Salomon and the company were one and the same person and
that the company was a mere agent for Salomon, and therefore they should be paid
in priority than Salomon.

Judgment: the House of Lords gave the judgment in favour of Solomon treating his
debentures being secured debt, created a charge on the property of the company,
and also declared that the company was, in the eyes of the law, a separate person
independent from Salomon. Salomon was not the agent or trustee of the company.

Case law
Lee vs. lee’s air farming ltd. (1961 ac 12)

Brief facts of the case; Mr. Lee was a pilot. He formed lee’s air farming ltd. He took
2,999 shares out of total shares 3,000. He was the managing director of that
company. He himself voted for the appointment of pilot in the company. Thus he
was appointed as a pilot. Some year after, he was killed in an aero plane accident.
Mrs. Lee claimed the compensation from lee’s air farming ltd., and it’s insured. The

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insures contended that Mr. lee was not an employee of lee’s air farming ltd, because
he himself retained the shares 2.999 out of 3.000 shares, and the company and he
were the same person. Judgment; the House of Lords gave the judgment in favor of
Mrs. Lee. Their lordships held that the company lee’s air farming ltd had legal
entity. It was independent with Mr. Lee. In effect, the magic of corporate personality
enabled lee to be the master and servant at the same time. It accepted the claim of
Mrs. Lee.

2. Limited liability;

Limited liability;- means the liability of the member is limited to the extent of his
share only. In a partnership firm, the partner is liable to the complete extent, even
personal liability also in a partnership firm, A and B partners invest Rs. 1.00.000
towards the capital of the firm, each @Rs 50.000/- the firm brings one lakh rupees
loan, and becomes insolvent. B also becomes insolvent. A is solvent. The creditors
sue A for the recovery of one lakh rupees. A is liable to pay entire amount, being the
partner of the firm. He is personally also liable for the loan of the partnership firm.
In the partnership firms, the principle of principal and agency is applied. A
partnerships firm does not contain separate legal existence it is not a juristic
person. But a company incorporated protects the members of it in way of limited
liability. In a company, the principle of principal and agency does not apply. The
shareholder is liable to the extent of his share amount only, not exceeded that. This
is the main distinction between partnership firm and company.

Examples; a company is started with 100crores of share amount. Suppose you have
purchased 100 shares each worth Rs. 10/- . Totally you paid Rs. 1.000/- if the
company is the in profit you will get profit at the rate divided for each share. If the
company is in loss you will get loss on Rs. 1.000/-. at the rate divided for each
share. Supposes you paid 1000 towards the share amount and
you are due to pay Rs. 500as call if the company is wounded up due to losses you
have to pay the remain grs 500 call amount. If you have already paid Rs. 1.000
towards your hundred shares and the debt is in excess of share value, your share
amount is paid towards the debt, and you are not liable to pay additional money
towards the debt.

3. Perpetual succession;
A man dies. But an incorporated company never dies. It is an entity with perpetual
succession.

Blackstone explains. Perpetual succession therefore means that the membership of

a company may keep changing from time to time but that does not affect the
company’s continuity in the like manners as the river Thames is still the same river,
though the parts which compose it are changing every instant.

Grower, the jurisprudent says; the members may come and go but the company
can go on forever. During the war all the members of one private company, while in

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general meeting, were killed by a bomb but the company survived not even a
hydrogen bomb could have destroyed it.

4. Separate property;
The company is a juristic person. It has its own legal property. It is liable for its own
debts it is independent to its members. The member’s liability is limited to the
extent of their shares only.

Case law

Macaura vs. northern assurance co. ltd (1925AC 619)

Brief facts: - A timber merchant owned timber business. He formed northern

assurance co. ltd. and became the managing director. The timber yard was
transferred to the company, the timber merchant insured entire timber yard on his
personal name. Later, the timber yard was destroyed in a fire accident. The
company claimed insurance the insurance company contended that the timber yard
was owned by the company and insured by another person therefore they could not
pay the compensation.

Judgment; The House of Lords admitted the contention of the insurance company.

Principle: Walton, judge explained the property of the company is not the property
of shareholders. It is the property of the company.
5. Transferable shares;

The shares of a public company can easily be transferable. The transferee and
transferor shall have to sign on form no. 7-c and other, necessary from under sec.
108 and shall submit them along with the original share certificate to the Registrar
of companies and register the name of the transferee the name of the transferee.
The name of the transferee shall also be entered in the Register of members of the
concerned company, and the name of the transferor shall be struck out.

6. Capacity to sue and be sued;

The company comes into existence from the date on which the certificate of
incorporation is granted. This certificate brings the company into existence as a
legal person. It can sue can be sued in its own name

7. Accumulation of large capital;

A large capital can be accumulated by way of incorporation. Such large amount

cannot be procured by a proprietorship or partnership firm. The company limited
company and all multi-national companies can accumulate huge capital by way of
sale of shares throughout the country and each at the global level. The budget of
some of the multi-national corporation exceeds several folds than Indian’s annual

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budget, the budget of Microsoft. A multi-national corporation of Bill Gate of
America is several times greater than our country’s budget.

8. Centralized management;

All the companies are managed under the centralized management, i.e., the board of
director’s the shareholder indirectly. Therefore fast and quality decisions and their
implementation take place.

Disadvantages of incorporation

Comparatively, advantages of incorporation are very large and convenient than

disadvantages of incorporation disadvantages are very less and very few these are;

1.Lifting the corporate veil;

2.Formality and expenses;
3.Company is not a citizen; and
4.Criminal liability.

1. Lifting the corporate veil;

Meaning: - the rule in Salomon vs. Salomon & co. ltd. It is also known as the veil of
corporation, independent corporate existence, corporate personality the courts are
bound to honour this principle. The veil of corporation is only a fictional veil, and it
is not a wall between the company and its members. But sometimes, the person
creates the company for their pure selfishness with fraud means, under such
circumstances. Courts lift the veil. And withdraw the corporate personality from
such corporation. It is called lifting the corporate Veil.

Definition: the supreme court of America Corporation will be looked upon as a legal
entity as a general rule… but when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the law will regard the
corporation as an association of persons.

Exception to Salomon’s rules: - lifting of corporate veil is the exception to Salomon

vs. Salomon &co. ltd. Rule. Salomon rule is a general rule. It is an exception to
lifting of corporate veil. This lifting of corporate veil can be studies in in the following
sub-heads.

a.enemy character
b.to prevent tax evasion
c. fraud or improper conduct
d.acting as agent or trustee of the shareholders
e.where the company is a sham
f. protection of public policy
g.arrangement or amalgamation

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a. Enemy characters: - the function, purpose, object, etc. of a company should be
in accordance with the nation’s interest, besides its own profitability motto.
The company should strengthen the nation’s economy. It should not encourage the
enemy country. This is called. Determination of enemy character if any sings of
enemy characters are shown in any company. Then the court can interfere, and can
lift the corporate veil. DAIMLER CO TIRE VS. CONTINENTAL TIRE & RUBBER CO.is
the leading case on this topic.

b. To prevent tax evasion: in fact, incorporation of company is intended for the tax
benefits every country gives certain tax benefits to companies. This is the important
reason for the development of companies all over the world However; some persons
try to evade the taxes. To prevent such tax evasion, the corporate veil may be lifted.
SIR DINSHAW MANECKJEE PETIT is the leading case.

In re sir dinshaw maneckjee petit (AIR 1927 Dom 371)

Brief facts; dinshaw maneckjee petit was a very rich man. With an intention to
evade the taxes he formed four companies I which he was the managing director
and filled those companies with his family members. After incorporation, he diverted
all his black-money to those companies. Thereafter, he obtained loan from those
companies. The resources of income to those companies were not disclosed. The fact
to evade the tax evasion was apparent on the face of record.

Judgment; the Bombay high court held that the four companies were fake, and
lifted corporate veil of them.

c. Fraud or improper conduct; some persons create a fake company with an

intention to defraud the opposite parties and to avoid legal obligations. When the
fraud is apparent on the face of the record, the court could interfere and decide the
company as improper.

Jones vs. lip man (1962)

Brief fact of case; lip man had certain lands. He entered into an agreement to sell
the land to jones. Later, he changed his mind. He approached an advocate and
asked the way to evade the agreement. The advocate advised him to form a company
and to sell the land to it. According to the advice, lip man formed a company with
him and the clerk of advocate. After incorporation, he registered the sale deed on
the land to that company. Jones sued lip man for the specific performance of the
contract. Lip man & co. interfered and contended that it had purchased the land.

Judgment; the house of lord held that incorporation of lip man& co. was a fake and
intended to defraud the original purchase-jones. It ignored the transfer between lip
man and lip man & co., and ordered lip man to convey the land to jones.

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d. Company acting as agent or trustee of the share holders; where a company is
acting as agent for its shareholders and such acting may be set aside by the courts
in certain appropriate case. In those circumstances, the corporate veil is lifted by
the courts.

In re F.G. films ltd. (1953)

Brief facts; an American company wanted to film in India. That American company
wanted to incorporate a company in Britain, with 90%shares of the company and
10% shares of British people the board of trade of Great Britain refused to register
the firm as a British firm. The American company challenged the decision of the
board. (The incident of this case occurred before the independence of India, which
was under the control of Great Britain.)

Judgment; the House of Lords upheld the decision of the board. e. Where the
company is a shame; competition is the basic principle of the business. But such
competition must be within some limits, and should not encroach and defraud
others. Where some of the employees or subscribers of a company want to destroy
that company and want to establish a rival company then that new company is a
sham company. The court may lift the veil of tat Sham Company to protect the
original company.

Gilford motor co. ltd vs. Horne (1933(1)1 Ch 935)

Brief facts; Horne was the employee of Gilford motor co. ltd. There was a contract
between Horne and that company not to solicit its customers. Due to misconduct,
Horne was removed from the services by the company as soon as he was removed,
he formed another company and solicited the customers of Gilford motor co. ltd.
Gilford motor co. ltd sued Horne.

Judgment: the court described the company formed by Horne as a device, a

stratagem and also as a mere cloak or sham for the purpose of enabling the
defendant to commit a breach of his conenant against solicitation.

f. Protection of public policy: the courts may intervene with the fake companies,
whose functioning and objects are against the public policy. To protect the public
policy, the courts may lift the corporate veil of such companies.

g. Arrangement or amalgamation: the compromise or arrangement between

company and its creditors or members or any class of them leads to amalgamation
of one company with another. In that circumstances, the amalgamation company
losses its separate existence.

Miheer H. mafatlal vs. mafatlal industries ltd. (1997)1 SCC 579 SC

Brief facts: the majority shareholders of mafatlal fine spinning and manufacturing
company ltd. (MFL) resolved to amalgamate in with mafatlal industries ltd. a scheme

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of compromise and arrangement was prepared between the transferor-company and
transferee-company. One of the shareholders challenged it under minority rights.

JUDGMENT: the Supreme Court gave the judgment in favour of amalgamation

2. Formality and expenses: - the incorporation of a company requires Many

formalities, time, money etc. The promoters have to submit several forms as per
requirements of the companies act and rules. It is also expensive comparing with
partnership firm, it is very hard and difficult job to form and continue a company.
To form a partnership firm it is very easy and also free from all these complication
several restriction are imposed upon the promoters, directors and even on
shareholders. Practically the board of directors is responsible for the acts ultra vires
or for non-implementing procedure form time to time that is why JENKINS said
corporate directors wake up each morning as potentials criminals.

3. Company is not a citizen: - a company is a juristic person. It has legal entity.

But it is a citizen, whether the fundamental rights can be granted to accompany.
These are certain questions arose before the Supreme Court whether the
corporation or a company is regarded as a citizen. Whether the fundamental rights
can be granted to company. This are the some of the important questions posed
before the supreme court citizenship is granted to a human being born in india
company is also a person the man is a human person, whereas the company is a
juristic person. The fundamental rights especially article 19 of the constitution is
conferred on a human person. Until 1963, the Supreme Court did not recognize
company or corporation as a citizen for the purpose of fundamental rights.

4. Criminal liability: - the companies act and rules impose very strict civil and
criminal liabilities on the directors, promoters managing directors, manager’s tec.
These civil and criminal liabilities are imposed for safeguarding the shareholders.
The executive of the company have to file several returns and information to the
registrar of companies regularly. The companies shall have to pay fees for every kind
of returns filed before the registrar. In case, the company does not file all of such
returns in time. It would become breach of the companies act and rules. Such
circumstances lead to civil and criminal liabilities including imprisonments upon
the directors, promoters, executives, etc.

JENKINS SAID corporate directors wake up each morning as potential criminals.

Due to these restrictions, several persons fear to form private limited and public
companies, and prefer partnership businesses, which are comparatively fee from all
these complications.

Conclusion: - while disposing secy., HSEB vs. Suresh (Banerjee, J.) (1999) 3
SCC 601)

The Supreme Court observed: while it is true the doctrine enunciated in Salomon
vs. Salomon &co. ltd.

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Came to be recognized in the corporate jurisprudence but its applicability in the
present context cannot be doubted, since the law court invariably has to up to the
occasion to do justice between the parties in a manner as it deems fit.

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Difference Between Private and Public Company under Companies Act 2013
Companies are often categorised as Private Limited or Public Limited companies, each with its own set of
characteristics and regulatory requirements. Understanding the difference between private and public
company under Companies Act 2013 is crucial for entrepreneurs, investors and those navigating the
complex landscape of corporate governance.

A company is a legal entity that is separate from its owners. It can do business, own things and take on
responsibilities. The laws of the place where it’s created control and guide it. People or other entities can
own a company.

What is a Private Company?

A private company, like a public limited company, falls under the Companies Act, 2013. According to this
Act, a private company, defined in section 2(68), is a joint stock company formed by 2 or more members.

Unlike public companies, private ones can’t list their shares on stock exchanges and their shares can’t be
traded publicly. Rules about transferring shares in a private company are strict. The Act states that a private
company is a voluntary association of 2 or more people, with a minimum paid-up capital of Rs. 1,00,000.

Also, the maximum number of members is limited to 200, excluding current or ex-employees who remain
members. It’s important for a private company to have ‘Private Limited’ in its name.

What is a Public Company?

A public company, according to section 2(71) of the Companies Act, 2013, is basically any joint stock
company under the Act that isn’t a private company. Public companies must have a minimum paid-up
capital of Rs. 5,00,000 and at least 7 members.

Unlike private companies, there’s no limit on the maximum number of members in a public company. Their
shares are listed on stock exchanges and can be traded following SEBI guidelines. Public companies need
to include ‘Public Limited’ in their name so everyone knows their nature.

Key Differences Between Private and Public Company under Companies Act 2013
The difference between private and public company under Companies Act 2013 are”

Ownership and Structure

One of the fundamental differences between private and public companies under Companies Act 2013 lies
in their ownership and structure. A private company is characterised by a more exclusive ownership
structure.

It requires a minimum of two members and can have a maximum of 200 members. In contrast, a public
company must have a minimum of seven members and there is no upper limit on the number of members,
allowing for a broader ownership base.

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Directors and Governance
The composition of directors is another crucial aspect that sets these two types of companies apart. A
private company must have a minimum of two directors, with a maximum limit of 15 directors.

On the other hand, a public company necessitates a minimum of three directors, with the same maximum
limit of 15 directors. This variance in directorial requirements reflects the scale and complexity of decision-
making processes within each company type.

Share Transferability
The ease with which shares can be bought and sold is a notable difference between private and public
company under Companies Act 2013. In private companies, shares can be transferred, but this process is
subject to certain restrictions.

This limitation is in stark contrast to public companies, where shares are freely transferable. The ability to
trade shares openly on stock exchanges is a characteristic feature of public companies, providing liquidity
to investors.

Raising Capital from the Public

The ability to raise funds from the public is a significant factor influencing the choice between between
private and public company under Companies Act 2013 structures. private companies are restricted in their
capacity to raise funds publicly.

They cannot issue a prospectus to the public for fundraising. In contrast, public companies have the
advantage of being able to raise capital from the public through the issuance of shares, enabling them to
tap into a wider pool of investors.

Regulatory Compliance
The regulatory landscape for private and public companies varies significantly. private companies are not
obliged to appoint an independent director, form an audit committee or establish a nomination and
remuneration committee.

On the contrary, public companies are mandated by law to have at least two independent directors on their
board if they meet certain financial criteria. Additionally, they are required to constitute an audit committee
and a nomination and remuneration committee.

Furthermore, public companies are subject to more stringent regulations concerning corporate
governance, transparency and accountability due to their widespread ownership structure. Compliance with
these regulations is not only a legal requirement but also enhances the credibility and trustworthiness of
the company in the eyes of investors and the public.

Appointment of Directors and Key Managerial Personnel

The process of appointing directors and key managerial personnel differs between private and public
companies. private companies have more flexibility in appointing two or more directors through a single
resolution without stringent restrictions. In contrast, public companies face the requirement that such
appointments must be agreed upon by all members at a general meeting.

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Moreover, the appointment of key managerial personnel, such as the managing director, company
secretary and chief financial officer, is not compulsory for private companies. However, a private company
with a paid-up share capital of Rs. 10 crores or more is required to have a whole-time company secretary.

In contrast, public companies with a paid-up share capital of Rs. 10 crores or more are obligated to appoint
key managerial personnel, emphasising the need for specialised roles in larger, publicly traded entities.

Quorum for General Meetings

The quorum for general meetings is another aspect where there is a difference between private and public
company under Companies Act 2013. In private companies, a quorum is formed by the presence of two
members. In contrast, the quorum for public companies is contingent upon the total number of members.

For instance, if the total number of members is less than or equal to 1000, the quorum is set at 5 members.
As the total number of members increases, the quorum requirements also escalate, with different
thresholds for companies with 1000 to 5000 members and those exceeding 5000 members.

Rotation of Directors
The concept of rotating directors is specific to public companies. According to regulations, two-thirds of
the total number of directors in a public company are liable to be retired by rotation every year.

This mechanism ensures a periodic refreshment of the board, bringing in new perspectives and preventing
stagnation in the decision-making process. In contrast, the provisions of rotation of directors are not
applicable to private companies, allowing for a more stable board structure.

Use of Suffix and Managerial Remuneration

The names of private and public companies are distinguished by the suffix used. private companies are
required to use the suffix ‘Private Limited’ in their names, while public companies must use ‘Limited.’ This
naming convention reflects the nature of their corporate structure and serves as a clear identifier for
stakeholders.

Regarding managerial remuneration there is a difference between private and public companies under
Companies Act 2013, private companies do not face specific restrictions on the remuneration paid to their
managing director, manager or whole-time director. In contrast, public companies are subject to
regulations limiting the overall remuneration paid to these roles to 11% of the net profits of the company
in a particular financial year. This restriction aims to ensure fairness and prevent excessive remuneration in
publicly accountable entities.

Here is a table summarising the difference between private and public company under Companies Act
2013:

asis of Difference Private Limited Company Public Limited Company

Number of Directors 2 to 15 directors 3 to 15 directors

7 or more members, no upper

Number of Members 2 to 200 members
limit

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 Share Transferability Limited by restrictions Freely transferable

Raising Funds from the Can raise funds from the

Cannot raise funds publicly
Public public

Participation of Interested Cannot participate in items of

Can participate after disclosing interest
Director interest

Independent Director Mandatory for specific criteria,

Not mandatory
Requirement with committees

Women Director and Not compulsory for women director, Compulsory for women
Resident Director needs a resident director director under specific criteria

Voting Rights of Preference Determined by Memorandum or Articles Limited to specific resolutions

Shareholders of Association for preference shareholders

Conditions to meet; borrowings and Requires reduction of share

Buyback of Shares
defaults considered capital under Companies Act

Acceptance of Deposits from Strict conditions, including

Conditions apply, no limit for startups
Members circular issuance and deposit

Appointment of Directors Requires agreement from all

Allowed without restriction
through a Single Resolution members at a general meeting

Conditions apply, considering borrowings

Loan to Directors Not allowed
and defaults

Appointment of Key Not compulsory, but Company Secretary Compulsory if capital > Rs. 10
Managerial Personnel if capital > Rs. 10 crores crores, includes specific roles

Depends on total members: 5,

Quorum for General Meeting 2 members present
15 or 30 members

2/3rd of directors retire by

Rotation of Directors Not applicable
rotation annually

Use of Suffix ‘Private Limited’ in the name ‘Limited’ in the name

Restriction on Managerial Overall remuneration cannot

No specific restriction
Remuneration exceed 11% of net profits

Public Limited vs Private Limited Company: Which is Better?

Choosing between a Public Limited Company and a Private Limited Company is a significant decision that
depends on various factors. Each type of company has its own set of advantages and disadvantages,

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making them suitable for different business scenarios. To make an informed decision, one must consider
several key points:

Scale of Business
Private Limited Company: Suited for small-scale businesses with lower capital requirements and a smaller
management team.

Public Limited Company: Ideal for larger businesses involving substantial capital, extensive machinery use
and a larger workforce.

Compliance Requirements
Private Limited Company: In India, private companies generally face lower compliance requirements
compared to their public counterparts. This results in lower compliance costs for private companies.

Public Limited Company: Public companies, due to their wider ownership and market exposure, are
subject to more stringent compliance regulations, leading to higher compliance costs.

Expansion Opportunities
Private Limited Company: Limited chances of expansion as private companies cannot raise funds from
the public. Expansion is typically funded through private investments or loans.

Public Limited Company: Offers endless opportunities for expansion as they can list their shares on stock
exchanges, allowing them to raise funds from the public. This provides a substantial financial advantage for
growth and development.

Brand Recognition
Private Limited Company: May face challenges in terms of brand recognition, as they operate on a
smaller scale and often within a specific niche.

Public Limited Company: Enjoys easier brand recognition due to the widespread visibility associated with
being listed on the stock exchange. This can enhance the company’s reputation and attract more attention
from investors and consumers.

Conclusion
The difference between private and public company under the Companies Act 2013 extend across various
facets, including ownership structure, governance, share transferability, regulatory compliance and
managerial processes.

Choosing between these two corporate structures depends on the business’s specific objectives, scale and
the extent to which it seeks to engage with the public and financial markets.

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