Types of Companies – Long Answer Questions
Medium Level (Application & Explanation)
Q1. Define a private company and explain its main features.
Answer:
- A private company is a company that restricts the transfer of its shares.
- It must have a minimum of 2 members and can have up to 200 members.
- It cannot invite the public to subscribe to its shares.
- The name of such a company must end with “Private Limited.”
- For example, ABC Technologies Private Limited is a private company.
- Thus, private companies are smaller and more controlled in nature.
Q2. Define a public company and explain its main features.
Answer:
- A public company is one that is not private.
- It must have at least 7 members, but there is no limit on the maximum members.
- There are no restrictions on transferring its shares.
- It can invite the public to invest by issuing shares or debentures.
- For example, Infosys Ltd. is a public company.
- This structure helps companies raise large capital.
Q3. What are the privileges that a private company enjoys over a public company?
Answer:
- A private company can be formed with only two members, while a public company needs seven.
- It is not required to issue a prospectus, as it does not invite the public.
- It can start business immediately after incorporation.
- It needs only two directors, while a public company needs at least three.
- It is not required to maintain an index of members.
- These privileges make private companies more flexible and less regulated.
Q4. Compare the requirements of directors in private and public companies.
Answer:
- A private company must have a minimum of two directors.
- A public company must have a minimum of three directors.
- Both types of companies can have a maximum of fifteen directors.
- This rule ensures proper management and decision-making.
- For example, a small private IT startup can run with two directors.
- But a large public company like Tata Motors requires at least three for better governance.
Q5. Explain the importance of restrictions on transfer of shares in a private company.
Answer:
- In a private company, shares cannot be freely transferred.
- This protects the company from unwanted outsiders becoming shareholders.
- It helps in keeping control within a small group of trusted people.
- For example, in a family business run as a private company, ownership remains within family members.
- This restriction provides stability and security to small companies.
- Thus, it suits closely-held businesses.
High Complexity (Analysis & Scenario-Based)
Q6. A group of two friends wants to start a company. Should they form a private or public company? Give reasons.
Answer:
- Since only two people are involved, they can form a private company.
- A public company requires at least seven members, which they don’t have.
- In a private company, they can also keep control of decision-making.
- They are not required to issue a prospectus or maintain an index of members.
- They can also start business immediately after incorporation.
- Thus, for two friends, a private limited company is the best option.
Q7. If a private company wants to invite the public to buy its shares, can it do so? Explain.
Answer:
- No, a private company cannot invite the public to buy its shares.
- It is legally restricted from issuing a prospectus or making public offers.
- If it wants to raise money from the public, it must convert into a public company.
- A public company can freely sell its shares in the stock market.
- For example, Reliance became successful because it was a public company and invited public investment.
- Thus, only a public company can invite the public to invest.
Q8. A family runs a successful private company but now wants to expand and raise more money. Should they convert into a public company? Why or why not?
Answer:
- Yes, they should consider converting into a public company.
- A private company is limited to 200 members, so it cannot raise unlimited funds.
- A public company has no limit on members and can invite the public.
- By issuing shares or debentures, it can raise huge capital for expansion.
- For example, many Indian startups begin as private companies but later become public to grow.
- Hence, conversion allows access to greater financial resources.
Q9. Explain how the restriction on “index of members” differs between private and public companies.
Answer:
- A public company must maintain an index of members.
- This list records the details of all shareholders, which can be very large.
- A private company does not need to maintain this index.
- This reduces paperwork and makes it easier for small companies to manage.
- For example, a private startup with 10 members avoids this extra formality.
- Thus, this rule helps private companies remain less burdened by compliance.
Q10. Compare the transfer of shares in private and public companies with examples.
Answer:
- In a public company, shares are freely transferable.
- A shareholder can sell their shares on the stock exchange without company approval.
- In a private company, shares cannot be transferred freely.
- For example, in Reliance Ltd. (public), anyone can buy or sell shares in the market.
- But in ABC Technologies Pvt. Ltd., share transfer may require approval from directors.
- This shows that public companies are open and liquid, while private ones are closed and controlled.