What is a private company?

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Q. What is a private company?

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Concept understanding — Public Company Definition

Public Company – A First Look

Think of a business like a cricket team. A private company is like a club team – you need personal permission to join, and you can't sell your spot to just anyone. A public company is like an IPL franchise – anyone with money can buy a share (ticket) from the open market, and the team's performance is reported publicly.

That's the core intuition: a public company can raise money from the general public by issuing shares, and those shares can be freely traded on a stock exchange.

The Precise Meaning (NCERT Definition)

According to the Companies Act, 2013, a public company is defined under Section 2(71) as a company which:

Is not a private company
Has a minimum paid-up share capital of ₹5,00,000 (or higher as prescribed)
Can invite the public to subscribe to its shares or debentures
Has no restriction on the transfer of its shares
Must have at least 7 members (minimum) – no maximum limit
Must add "Limited" (Ltd.) at the end of its name

Note

A private company becomes a public company when it meets these conditions. The key difference is the ability to raise funds from the public and freely transfer shares.

Why It Matters

For a Class 12 student, understanding "public company" is crucial because:

Source of funds – It can raise huge capital from thousands of investors through Initial Public Offer (IPO).
Accounting complexity – More shareholders mean more legal requirements: separate Share Capital Account, Securities Premium Account, and detailed Profit and Loss Appropriation Account.
Dividend distribution – Profits are distributed as dividends to shareholders, which requires proper accounting treatment.
Legal compliance – Must prepare financial statements as per Schedule III of the Companies Act.

Accounting Treatment – The Core

When a public company issues shares, the accounting treatment depends on the stage:

1. On Receiving Application Money

When investors apply for shares, the company receives application money. The entry is:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	X
To Share Application A/c		X
(Being application money received)

2. On Allotment of Shares

When shares are allotted, the application money is transferred to Share Capital:

Particulars	Debit (₹)	Credit (₹)
Share Application A/c Dr.	X
To Share Capital A/c		X
(Being application money transferred to share capital)

3. On Receiving Allotment Money

If allotment money is due and then received:

Particulars	Debit (₹)	Credit (₹)
Share Allotment A/c Dr.	Y
To Share Capital A/c		Y
(Being allotment money due)
Bank A/c Dr.	Y
To Share Allotment A/c		Y
(Being allotment money received)

4. On Calls (First Call, Final Call)

Similar treatment – each call is recorded separately:

Particulars	Debit (₹)	Credit (₹)
Share First Call A/c Dr.	Z
To Share Capital A/c		Z
(Being first call money due)
Bank A/c Dr.	Z
To Share First Call A/c		Z
(Being first call money received)

Important

All these accounts (Share Application, Share Allotment, Share Calls) are personal accounts – they represent amounts due from or received from shareholders. They are temporary accounts that get closed when the money is received and transferred to Share Capital.

The Share Capital Account Format (as per NCERT)

The Share Capital Account is a permanent account shown in the Balance Sheet under Equity and Liabilities. Here's the format:

Particulars	Amount (₹)
Authorised Capital
10,000 Equity Shares of ₹10 each	1,00,000
Issued Capital
8,000 Equity Shares of ₹10 each	80,000
Subscribed Capital
7,500 Equity Shares of ₹10 each	75,000
Called-up Capital
7,500 Equity Shares of ₹10 each (₹8 called-up)	60,000
Paid-up Capital
7,500 Equity Shares of ₹10 each (₹8 paid-up)	60,000
Less: Calls-in-Arrears	(2,000)
Net Paid-up Capital	58,000

Watch out

A common mistake: Students confuse Authorised Capital (maximum shares the company can issue) with Issued Capital (shares actually offered to public). They are NOT the same.

Profit and Loss Appropriation Account (for a Public Company)

When a public company earns profit, it must decide how to distribute it. The Profit and Loss Appropriation Account shows this:

Particulars	Amount (₹)	Particulars	Amount (₹)
To Transfer to General Reserve	10,000	By Net Profit (from P&L A/c)	1,00,000
To Proposed Dividend	40,000	By Balance b/d (Retained Earnings)	20,000
To Corporate Dividend Tax (if applicable)	8,000
To Balance c/d (Surplus)	62,000
Total	1,20,000	Total	1,20,000

Interest on Capital = Capital \times Rate \times Time Example: If capital is ₹5,00,000 at 10% p.a. for 6 months: Interest = 5,00,000 \times 10/100 \times 6/12 = ₹25,000

Key Takeaways for Exams

Public company ≠ Private company – Public can invite public subscription; private cannot.
Share Capital Account is a credit balance – it represents owners' equity.
All application/allotment/call accounts are debited when money is due and credited when received.
Calls-in-Arrears is a deduction from paid-up capital (shown as a negative).
Dividend is an appropriation of profit, not an expense – it appears in the Appropriation Account, not the Profit & Loss Account.

Important

For a public company, the minimum number of directors is 3 (vs. 2 for private). Also, a public company must issue a prospectus when inviting the public to subscribe – this is a legal document with full financial disclosure.

A private company is a company that restricts the right to transfer its shares, limits the number of its members to 200 (excluding employees), and prohibits any invitation to the public to subscribe for its securities.

Concept and Accounting Treatment

The definition of a private company is rooted in the Companies Act, 2013. The key idea is that a private company is a closely held entity — it is not meant for the general public to invest in. The law creates this distinction to reduce regulatory burden on smaller, owner-managed businesses, while protecting public investors from unregulated offerings.

From an accounting perspective, the classification matters because:

A private company cannot issue a prospectus to invite the public to buy its shares.
It has no minimum subscription requirement (unlike a public company).
Its financial statements are prepared under the same Schedule III format, but certain disclosures (like the number of shareholders) differ.

The three essential characteristics under Section 2(68) of the Companies Act, 2013 are:

Restriction on transfer of shares — The company's Articles of Association (AOA) must contain a clause that restricts members from freely selling their shares to outsiders. This keeps control within a known group.
Limit on number of members — Maximum 200 members (excluding employees who are also members). If two or more persons hold a share jointly, they count as one member. This prevents the company from becoming too widely held.
Prohibition on public invitation — The company cannot invite the general public to subscribe for its shares or debentures. It also cannot accept deposits from the public (except from its members or directors).

Watch out

A common mistake is to think a private company can have only 50 members. The correct limit under the 2013 Act is 200 members (excluding employees). Also, the restriction on share transfer must be in the Articles of Association, not just in practice.

Tip

To quickly identify a private company, look for the words "Private Limited" at the end of its name. Also check if its AOA contains a clause restricting share transfer — that is the defining legal test.

Additional Features (derived from the definition)

Minimum number of members: 2 (as against 7 for a public company).
Minimum number of directors: 2 (as against 3 for a public company).
No requirement for a prospectus or statement in lieu of prospectus.
Can start business immediately after incorporation (public company needs a certificate of commencement).
Less stringent compliance — e.g., no requirement to hold a statutory meeting or file a statutory report.

Note

A private company can be converted into a public company by altering its AOA and complying with the additional requirements. Similarly, a public company can be converted into a private company with the approval of the Central Government (now ROC).

Example for Clarity

If XYZ Ltd. has 150 members, restricts share transfer in its AOA, and has never invited the public to subscribe, it is a private company. If it later decides to raise funds from the public, it must first convert into a public company.

✓Final answer

A private company is defined under Section 2(68) of the Companies Act, 2013 as a company which, by its Articles, (a) restricts the right to transfer its shares, (b) limits the number of its members to 200 (excluding employees), and (c) prohibits any invitation to the public to subscribe for its securities. It must have a minimum of 2 members and 2 directors, and its name ends with "Private Limited".

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Q.What is a private company?

Concept and Accounting Treatment

Additional Features (derived from the definition)

Example for Clarity

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