Private and Public Limited Companies: Features and Comparison (ISC Class 12)
Updated 17 October 2026 · Fact-checked
A company is an artificial person created by law with a separate legal entity, limited liability and perpetual succession. A private limited company restricts transfer of shares, has 2 to 200 members and cannot invite the public to subscribe; a public limited company has at least 7 members, no maximum, free transfer of shares and may invite the public through a prospectus.
Understand Private and Public Limited Companies Compared with Proprietorship and Partnership
1. The four entities in one line each
- Sole proprietorship: one person owns, manages and controls the business; owner and business are one in law.
- Partnership: two or more persons agree to share the profits of a business carried on by all or any of them acting for all (Indian Partnership Act, 1932). The firm is not a separate legal person.
- Private limited company: a company that restricts the transfer of shares, limits its members and prohibits public invitation to subscribe for its securities.
- Public limited company: a company that is not a private company; it may invite the public to subscribe to its shares and debentures.
2. A company: the common features (companies under the Companies Act, 2013)
- Incorporated association: it comes into existence only on registration.
- Separate legal entity: it can own property, borrow, sue and be sued in its own name; it is distinct from its members.
- Limited liability: members are liable only up to the unpaid amount on their shares; their personal property is safe.
- Perpetual succession: the death, insolvency or exit of members does not end the company's life.
- Separation of ownership and management: members own the company; an elected board of directors manages it.
- Transferability of shares: free in a public company; restricted in a private company.
3. Private limited company
By its articles of association it (a) restricts the right to transfer shares, (b) limits the number of members to 200 (not counting certain employee-members), and (c) prohibits any invitation to the public to subscribe for its securities.
- Minimum 2 members and 2 directors; its name ends with 'Private Limited'.
- Fewer legal formalities than a public company.
- Suitable for family firms and start-ups that want limited liability without public shareholders.
*A private limited company is not the same as a private sector company.* A 'private sector' company simply means one not owned by the government; a public limited company can also be in the private sector.
4. Public limited company
- A company that is not a private company.
- Minimum 7 members, no maximum; at least 3 directors.
- May invite the public to subscribe to its shares and debentures through a prospectus.
- Shares are freely transferable and can be listed on a stock exchange.
- Name ends with 'Limited'; more rules and disclosure to protect investors.
5. Private versus public limited company
| Basis | Private limited company | Public limited company |
|---|---|---|
| Number of members | Minimum 2; maximum 200 | Minimum 7; no maximum |
| Number of directors | Minimum 2 | Minimum 3 |
| Transfer of shares | Restricted | Free |
| Invitation to the public | Prohibited | Allowed through a prospectus |
| Name ends with | 'Private Limited' | 'Limited' |
| Legal formalities and disclosure | Less | More |
| Capital raising | Limited sources | Wide sources, including the public |
6. Comparison of the four entities
| Basis | Sole proprietorship | Partnership | Private company | Public company |
|---|---|---|---|---|
| Law | No special law | Indian Partnership Act, 1932 | Companies Act, 2013 | Companies Act, 2013 |
| Members | One owner | At least 2 (maximum 50, as per the Companies Act rules) | 2 to 200 | At least 7 |
| Legal status | Same as owner | Not separate from partners | Separate entity | Separate entity |
| Liability | Unlimited | Unlimited, joint and several | Limited | Limited |
| Registration | Not required | Optional | Compulsory | Compulsory |
| Continuity | Ends with the owner | Affected by death, retirement or insolvency of a partner | Perpetual | Perpetual |
| Transfer of interest | Not as such | Only with consent of all partners | Restricted | Free |
| Management | The owner | Partners | Board (at least 2 directors) | Board (at least 3 directors) |
7. Which form suits which business? (case skill)
- A small local shop: sole proprietorship, for easy formation and control.
- Two friends starting a consultancy with mutual trust: partnership.
- A family manufacturing firm that wants limited liability but not outside shareholders: private limited company.
- A large project needing crores of rupees from thousands of investors: public limited company.
Always give a reason in terms of capital, risk, control or growth.
Private and Public Limited Companies Compared with Proprietorship and Partnership: key facts
- Private company
- Restricts transfer of shares
- 2 to 200 members
- No public invitation
- Name ends with Private Limited
- Defining features.
- Public company
- At least 7 members
- No maximum
- Free transfer
- Prospectus allowed
- Name ends with Limited
- Defining features.
- Company features
- Incorporated
- Separate legal entity
- Limited liability
- Perpetual succession
- Board of directors
- Common to both.
How to answer Private and Public Limited Companies Compared with Proprietorship and Partnership questions
Expect the meaning of a private or public company, a distinction, a comparison of forms, and the choice of a form in a case.
- 1Check the number of members and the existence of public invitation: these separate private from public.
- 2For a distinction, write full sentences on number of members, transfer of shares, invitation to the public and formalities.
- 3For a comparison of all four, put liability, legal status, continuity and registration in a table.
- 4In a case, justify the form by capital needed, risk and control.
Private and Public Limited Companies Compared with Proprietorship and Partnership in real life
The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.
Separate legal entity
Suppose a company with three shareholders owes ₹40 lakh to a supplier but its assets are worth only ₹25 lakh. One shareholder owns a house worth ₹80 lakh.
Can the supplier claim the shareholder's house? Why?
Try it first, then show the solutionSolution
- The company is a separate legal entity, so the debt belongs to the company.
- Members' liability is limited to the unpaid amount on their shares.
Answer: No, the shareholder's personal property is protected by the company's separate legal entity and limited liability (unless his shares are partly unpaid).
Memory hook: The company wears its own coat.
Private limited company
Imagine a family bakery that wants to protect the family's personal property from business debts but does not want to sell its shares to the public.
Which form of business suits it?
Try it first, then show the solutionSolution
- Limited liability is required.
- Public subscription is not wanted, so a private company fits.
Answer: A private limited company.
Memory hook: Private: closed circle, limited risk.
Tricks to remember Private and Public Limited Companies Compared with Proprietorship and Partnership
Short memory aids. Say each one aloud once, then use it on a question the same day.
2-200 and 7-no limit
Private: 2 to 200; Public: 7 and up with no limit.
Use it when: Number of members.
Three restrictions of a private company
Transfer restricted, members limited, public invitation prohibited: 'T-M-P'.
Use it when: Definition of private company.
Private and Public Limited Companies Compared with Proprietorship and Partnership: solved examples
Ordered from board level to HOTS. Try each one before you open the solution.
Example 1: Members · 1 mark · Very short answerBoard level
Five friends want to form a public limited company. How many more members at least do they need?
Try it first, then show the solutionSolution
- A public limited company needs a minimum of seven members.
- 7 - 5 = 2 more members.
Answer: At least 2 more members (seven are needed).
Example 2: Liability · 1 mark · MCQBoard level
In which of the following is the liability of the owners unlimited?
(a) Private limited company
(b) Public limited company
(c) Sole proprietorship
(d) Both (a) and (b)
Try it first, then show the solutionSolution
- In companies, liability is limited to the unpaid share capital.
- The sole proprietor's liability is unlimited.
Answer: (c)
Example 3: Private versus public company · 4 marks · Short answerHarder board level
Two cousins ask whether to form their firm as a private or a public limited company. Set out four points of difference between the two kinds of company, in complete sentences, to advise them.
Try it first, then show the solutionSolution
- Members: a private company needs 2 to 200 members; a public company needs at least 7, with no maximum.
- Transfer of shares: restricted in a private company; free in a public company.
- Public invitation: prohibited in a private company; permitted through a prospectus in a public company.
- Formalities: fewer for a private company; more regulation and disclosure for a public company.
Answer: Four differences: members, transfer of shares, invitation to the public and formalities.
Example 4: Private company is not private sector · 4 marks · Short answerHarder board level
A student writes that a private limited company is a company owned by private persons and not by the government. Explain what is wrong with this and give the correct definition.
Try it first, then show the solutionSolution
- The student has described a private sector company, which only means that it is not owned by the government.
- A public limited company can also be in the private sector.
- A private limited company is a company that by its articles restricts the transfer of its shares, limits its members to 200 and prohibits invitation to the public to subscribe for its securities.
Answer: She confused a private company with a private sector company; the correct definition rests on the three restrictions.
Example 5: Choose the form · 8 marks · Long answerHOTS / competency
Suppose four ventures are planned: (i) a tuition centre by a teacher alone, (ii) a design studio by two partners who trust each other, (iii) a manufacturing business needing ₹300 crore from thousands of investors, and (iv) a family spice business that wants limited liability without outside shareholders. Recommend the most suitable form for each, with a reason and one limitation of the form chosen.
Try it first, then show the solutionSolution
- (i) Sole proprietorship: easy to start, full control; limitation: unlimited liability and limited capital.
- (ii) Partnership: shared capital and skills, easy to form; limitation: unlimited liability and possible disputes.
- (iii) Public limited company: it can invite the public and raise large funds; limitation: more regulation and disclosure.
- (iv) Private limited company: limited liability, no public shareholders; limitation: shares cannot be freely sold and capital is limited to private sources.
- Choice depends on capital, risk, control and growth.
Answer: (i) Proprietorship; (ii) partnership; (iii) public limited; (iv) private limited, each with a stated reason and limitation.
Where students lose marks in Private and Public Limited Companies Compared with Proprietorship and Partnership
The slips examiners see most often, and what to write instead.
Mistake: Treating a private company as a private sector company
A common error is to describe a private limited company as a company owned by private persons (a private sector company).
Wrong working
A private limited company is one owned by private individuals, not the government.
Right working
A private limited company restricts transfer of shares, limits members to 200 and prohibits public invitation to subscribe.
Do this: Use the three restrictions.
Usually costs: 2-4 marks.
Mistake: Defining the company only by number of members
The ban on public subscription is the key restriction.
Wrong working
A private company has 2 to 200 members.
Right working
A private company restricts transfer of shares, limits members and prohibits public invitation.
Do this: Always include all three.
Usually costs: 1-2 marks.
Mistake: Calling a registered partnership a separate legal person
Registration is confused with incorporation.
Wrong working
A registered partnership firm is a separate legal entity.
Right working
A partnership, even if registered, is not a separate legal person; the partners remain liable without limit.
Do this: Only companies are separate legal entities.
Usually costs: 1-2 marks.
Mistake: Writing key numbers incorrectly
Key numbers such as 2, 200 and 7 are easily written wrongly under exam pressure.
Wrong working
Minimum members of a public company: 5.
Right working
Seven (7).
Do this: Learn the numbers 2, 200 and 7 and write them carefully, as figures or in correct spelling.
Usually costs: 1 mark.
Exam tips
- A common error is to treat a private limited company as a private sector company; write the three restrictions.
- Take care to write key numbers (2, 200, 7) correctly.
- The syllabus asks for meaning, definition and distinction of the four forms; keep the comparison table ready.
- In a choice question, justify the form with capital, risk, control and growth.
Practice questions on Private and Public Limited Companies Compared with Proprietorship and Partnership
Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.
Q1 · 1 mark · Very short answerBoard level
State two features common to private and public limited companies.
Hint
Legal entity and liability.
Answer
Any two of separate legal entity, limited liability, perpetual succession, management by a board of directors.
Q2 · 1 mark · Very short answerBoard level
What must a public limited company use in its name?
Hint
A single word at the end.
Answer
The word 'Limited'.
Q3 · 4 marks · Short answerHarder board level
A partnership firm and a private limited company each owe ₹5 lakh that their assets cannot meet. Explain what happens to the personal property of (i) the partners and (ii) the shareholders, and state the reason for each.
Hint
Legal status and liability.
Answer
(i) The partners' personal property can be used to pay the debt, because a partnership has no separate legal entity and the partners' liability is unlimited, joint and several. (ii) The shareholders' personal property is safe, because the company is a separate legal entity and their liability is limited to the unpaid amount on their shares.
Q4 · 4 marks · Short answerHarder board level
Explain with reasons why a start-up with eight founders who want to raise funds from the public later may prefer to begin as a private limited company and then convert to a public company.
Hint
Fewer formalities first.
Answer
A private limited company needs fewer legal formalities and less disclosure, which suits the early years, and it gives limited liability and a separate legal entity. As the business grows and needs large funds, it can convert to a public limited company, which may invite the public to subscribe to shares through a prospectus and whose shares are freely transferable and listed.
Q5 · 8 marks · Long answerHOTS / competency
Suppose an entrepreneur argues, 'A partnership is better than a company because it has no legal formalities and decisions are quick.' Evaluate the claim by comparing the two forms on liability, continuity and capital.
Hint
Ease versus risk and growth.
Answer
A partnership is easy to form (registration is optional) and decisions can be quick, since the partners are few. But partners have unlimited, joint and several liability, so personal property is at risk, and one partner's act binds the others. A partnership is also affected by the death, retirement or insolvency of a partner, and it has limited capital because it depends on the partners' contributions and loans. A company is a separate legal entity with limited liability, perpetual succession, and, if public, access to large capital from the public. So the claim holds only for small, trusted ventures; for growth and risk protection, a company is better.
Test your recall
Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.
1.What is the permitted range of members for a private limited company?Show answer
Minimum 2; maximum 200.
2.Minimum members of a public company?Show answer
Seven.
3.Which company can invite the public to subscribe?Show answer
The public limited company.
4.Does a partnership have a separate legal entity?Show answer
No.
5.What does perpetual succession mean?Show answer
The company's life is not affected by the death, insolvency or exit of members.
Private and Public Limited Companies Compared with Proprietorship and Partnership: frequently asked questions
Is a public limited company the same as a public sector company?
No. A public limited company may invite the public to subscribe to its shares; a public sector company is owned by the government.
What is a prospectus?
A document through which a public company invites the public to subscribe to its shares or debentures.
Which form has the easiest formation?
The sole proprietorship, since it needs few legal formalities.