Private vs. Public Company: The Major Differences

Within the framework of Nepal's economy, which depends largely on agriculture, the contribution of both state and private enterprises to economic growth is remarkable. Despite its focus on agriculture, Nepal is dependent on imports from its neighbors, which has led to a determined push to increase production and decrease dependency. As a result, both the public and private sectors are now engaged in Nepal's economic growth. This has led both the private and public sectors to actively contribute to Nepal's economic development.

In this blog, “Private vs. Public Company: The Major Differences”, it's crucial that these businesses, which are motivated by profit, don't sell shares to the general public.

Private companies, whether started through small startups, loans, or personal investments, function independently of the government, following fundamental laws and paying their annual taxes.

Entrepreneurs in Nepal face a pivotal decision early on: whether to structure their businesses as private or public and also how to register a business in Nepal from India. This decision has a big impact on corporate operations and is influenced by ownership choices, regulatory frameworks, and growth objectives.

The ownership and organizational structures of private and public companies are where the main differences are found. Profit is the driving force behind private businesses, which are kept under close ownership, whereas public businesses sell their shares to the public. Since this decision affects how businesses develop, entrepreneurs must understand the subtleties of these key distinctions in order to successfully negotiate the challenging business environment.

Types of Companies

In Nepal, there are three main types of companies: sole proprietorship, partnership, and private limited company.

Sole Proprietorship:

A sole proprietorship is the simplest and most common type of business in Nepal. It is owned and operated by a single individual, who personally bears all the risks and rewards of the business. There is no separate legal entity, so the owner's personal assets are liable for the debts of the business.

Examples of sole proprietorships in Nepal:

Small grocery stores

Street vendors

Freelancers

Consultants

Partnership:

A partnership is a business owned and operated by two or more individuals who share the profits and losses of the business. There are two main types of partnerships: general and limited.

General partnership: In a general partnership, all partners have unlimited liability, which means that they are personally liable for the debts of the business.

Limited partnership: In a limited partnership, there are two types of partners: general partners and limited partners. General partners have unlimited liability, while limited partners' liability is limited to the amount of capital they have invested in the partnership.

Examples of partnerships in Nepal:

Law firms

Accounting firms

Medical clinics

Small businesses

Private Limited Company

A private limited company is a separate legal entity from its owners. It has limited liability, which means that the owners are not personally liable for the debts of the business. Private companies are the most common type of company in Nepal.

Examples of private limited companies in Nepal:

CG Group

Khetan Group

Vaidya's Organization Of Industries and Trading Houses (VOITH)

Dugar Group

These companies are involved in a wide range of industries, including manufacturing, trading, and finance. They are some of the largest and most successful businesses in Nepal.

What is a private company in Nepal?

A private company in Nepal is a business entity that is owned by a limited number of shareholders and does not offer its shares for public subscription. Private companies are governed by the Companies Act of Nepal, 2063 (2006).

Characteristics of Private Companies

Minimum of 1 and maximum of 50 shareholders: The minimum number of shareholders in a private company in Nepal is one, and the maximum is fifty. The shareholders are the owners of the company and have limited liability protection. This means that their assets are not at risk if the company goes bankrupt.

No public offering of shares: Private companies are not allowed to offer their shares for public subscription. This means that shares can only be bought and sold by the existing shareholders.

Simpler registration process: The registration process for private companies is simpler than that for public companies. The required documents are fewer, and the process can be completed more quickly.

Less stringent reporting requirements: Private companies have less stringent reporting requirements than public companies. They are not required to file their financial statements with the Securities Board of Nepal (SEBON) unless they meet certain criteria.

Advantages of forming a private company in Nepal:

Limited liability protection: As mentioned earlier, the shareholders of a private company have limited liability protection. This means that their assets are not at risk if the company goes bankrupt.

Tax benefits: Private companies are subject to lower tax rates than public companies.

Flexibility: Private companies have more flexibility than public companies in terms of decision-making and ownership structure.

Examples of well-known private companies in Nepal

CG Group

Khetan Group

Vaidya's Organization Of Industries and Trading Houses (VOITH)

Limited access to capital: Private companies have limited access to capital compared to public companies. This is because they cannot offer their shares to the public. As a result, they may have to rely on debt financing, which can be more expensive and risky.

Lack of transparency: Private companies are not required to disclose as much information to the public as public companies. This can make it more difficult for investors to assess the company's financial health and make informed investment decisions.

Limited liquidity: The shares of a private company are not traded on a stock exchange, which makes them less liquid than the shares of a public company. This can make it more difficult for shareholders to sell their shares if they need to raise capital quickly.

Potential for conflicts of interest: Private companies are often owned and controlled by a small group of people. This can lead to conflicts of interest, as the owners may make decisions that are in their own best interests rather than the best interests of the company as a whole.

Succession planning can be difficult: It can be difficult to ensure a smooth transition of ownership and control in a private company, as there is no established mechanism for doing so. This can lead to uncertainty and instability in the company.

Succession planning can be difficult: It can be difficult to ensure a smooth transition of ownership and control in a private company, as there is no established mechanism for doing so. This can lead to uncertainty and instability in the company.

Registration Process of Private Companies in Nepal

The registration process for private companies in Nepal is governed by the Companies Act of Nepal, 2063 (2006), as amended by the Companies Act (Amendment) Act, 2080. The process is generally straightforward and can be completed within a few weeks.

Here is a summary of the registration process:

Step 1: Reservation of Company Name

Before applying for registration, it is important to reserve the proposed name of the company with the Office of the Company Registrar (OCR). This can be done online through the OCR's website.

Step 2: Preparation of Documents

Once the company name has been reserved, the following documents need to be prepared:

Two copies of the Memorandum of Association (MOA)

Two copies of the Articles of Association (AOA)

Citizenship certificates of all promoters

Power of Attorney (if applicable)

Application for registration (Form RC-1)

Fee payment challan (Form RC-2)

Step 3: Submission of Application

The completed application and all required documents should be submitted to the OCR. The application can be submitted in person or by post.

Step 4: Examination of Documents

The OCR will examine the submitted documents to ensure that they are complete and accurate. If there are any deficiencies, the OCR will request additional information or documents from the applicant.

Step 5: Issuance of Company Registration Certificate

If the documents are found to be in order, the OCR will issue a Company Registration Certificate (CRC) to the applicant. The CRC is the official document that confirms the legal existence of the company.

It is advisable to provide business consulting services in Nepal with a qualified legal or tax professional to ensure that all legal and tax requirements are met during the registration process.

What is a public company in Nepal?

A public company in Nepal is a business entity that has offered its shares to the public for subscription. This means that the company's shares can be freely bought and sold on a stock exchange. Public companies are subject to more stringent regulations than private companies, but they also have certain advantages, such as access to a larger pool of capital and increased transparency.

Characteristics Of Public Companies

Several key characteristics distinguish public companies from private companies in Nepal:

Public Offering of Shares: Public companies offer their shares for subscription to the public, either through an initial public offering (IPO) or a secondary offering.

Listing on a Stock Exchange: Public companies' shares are listed on a stock exchange, such as the Nepal Stock Exchange (Nepse), where they can be freely bought and sold by investors.

More Stringent Reporting Requirements: Public companies are subject to more stringent reporting (PLC) requirements than private companies. They must file their financial statements and other disclosures with the Securities Board of Nepal (SEBON) regularly.

Increased Transparency: Public companies are more transparent than private companies, as their financial information is publicly available. This can make it easier for investors to assess the company's financial health and make informed investment decisions.

Examples of public companies in Nepal:

Nabil Bank Limited Item

Nepal Telecom

NIC Asia Bank Limited

Advantages Of Public Companies

There are several advantages to forming a public company in Nepal:

Access to a Larger Pool of Capital: Public companies can raise capital by selling their shares to the public, which can provide them with a larger pool of capital than private companies. This can be used to fund expansion, new projects, or acquisitions.

Increased Transparency: Public companies are more transparent than private companies, as their financial information is publicly available. This can make it easier for the company to attract investors and partners.

Enhanced Brand Reputation: Being a public company can enhance a company's brand reputation and make it more attractive to potential customers and employees.

Potential for Increased Share Value: If a public company is successful, its share value can increase, which can benefit shareholders and provide them with a return on their investment.

Disadvantages Of Public Companies

More Stringent Reporting Requirements: Public companies are subject to more stringent reporting requirements than private companies, which can be time-consuming and costly.

Increased Regulatory Scrutiny: Public companies are subject to increased scrutiny from regulators, such as SEBON. This can be a burden on the company and limit its flexibility.

Potential for Share Price Volatility: The share price of a public company can be volatile, which can make it a riskier investment than a private company.

Increased Disclosure Requirements: Public companies are required to disclose more information than private companies, which can be a concern for some owners.

Registration Process Of Public Companies in Nepal

Sure, here is a summary of the registration process for public companies in Nepal according to the law in 2080:

Step 1: Preparation of Documents

Before applying for registration, the following documents need to be prepared:

Two copies of the Memorandum of Association (MOA)

Two copies of the Articles of Association (AOA)

Citizenship certificates of all promoters

Power of Attorney (if applicable)

Application for registration (Form RC-3)

Fee payment challan (Form RC-2)

Draft prospectus

A letter of intent from a stockbroker

No objection certificate from the Securities Board of Nepal (SEBON)

Environmental impact assessment (EIA) report (if applicable)

Credit rating report (if applicable)

Step 2: Submission of Application

The completed application and all required documents should be submitted to the Office of the Company Registrar (OCR). The application can be submitted in person or by post.

Step 3: Examination of Documents

The OCR will examine the submitted documents to ensure that they are complete and accurate. If there are any deficiencies, the OCR will request additional information or documents from the applicant.

Step 4: Verification of Draft Prospectus

The draft prospectus will be submitted to SEBON for verification. SEBON will review the prospectus to ensure that it is complete, accurate, and compliant with the Securities Act of Nepal, 2063 (2006).

Step 5: Public Offering of Shares

Once the draft prospectus has been verified by SEBON, the company can proceed with the public offering of its shares. The shares can be offered through an initial public offering (IPO) or a secondary offering.

Step 6: Listing on a Stock Exchange

If the public offering of shares is successful, the company can apply for listing on a stock exchange, such as the Nepal Stock Exchange (Nepse). Listing on a stock exchange will allow the company's shares to be freely bought and sold by investors.

Step 7: Issuance of Company Registration Certificate

If all of the above steps are completed successfully, the OCR will issue a Company Registration Certificate (CRC) to the applicant. The CRC is the official document that confirms the legal existence of a public company.

It is advisable to consult with a qualified legal or tax professional to ensure that all legal and tax requirements are met during the registration process.

Transition From Private To Public

Converting a private company to a public company, or going public, is a significant decision that can have both positive and negative implications for a business. Here's a breakdown of the key considerations involved in transitioning from a private to a public company:

Transition Process:

The process of converting from a private to a public company involves several steps:

Preparation and Filing of Documents: The company must prepare and file various documents, including a prospectus, with regulatory authorities.

Regulatory Approval: The regulatory body, such as the Securities and Exchange Commission (SEC), reviews the company's documents and approves the public offering.

Marketing and Roadshow: The company conducts a marketing campaign and roadshow to attract investors and promote the IPO.

Public Offering: The company offers its shares to the public through an IPO, setting a price for each share.

Listing on a Stock Exchange: Once the IPO is successful, the company's shares are listed on a stock exchange, allowing them to be traded publicly.

Private vs. Public Companies

Feature	Private Company	Public Company
Ownership Structure	Closed ownership structure with a limited number of shareholders	Open ownership structure with shares offered to the public;
Funding Sources	Limited funding options, primarily relying on private investors	Access to capital through public offerings and secondary markets
Transparency and Reporting	Less stringent reporting requirements	Strict reporting requirements and public disclosures
Regulatory Burden	Less regulatory oversight	Subject to extensive regulations and scrutiny from regulators
Shareholder Liquidity	Shares are not freely tradable	Shares are traded on a stock exchange, providing liquidity for investors
Cost of Operations	Lower operating costs due to fewer regulatory requirements	Higher operating costs due to compliance and disclosure obligations

Closing a Private Company in Nepal

Closing a private company in Nepal involves a series of steps to legally dissolve the entity and wind up its affairs. The process is governed by the Companies Act of Nepal, 2063 (2006).

Steps to Close a Private Company in Nepal:

Hold a General Meeting of Shareholders: Convene a general meeting of shareholders to pass a special resolution for the voluntary dissolution of the company.

File an Application for Voluntary Dissolution: Submit an application for voluntary dissolution to the Office of the Company Registrar (OCR) along with the required fees.

Publish a Notice of Dissolution: Publish a notice of the dissolution in at least two newspapers, one being a national daily newspaper.

Pay Off Debts and Liabilities: Settle all outstanding debts and liabilities of the company.

Distribute Remaining Assets: Distribute the remaining assets of the company to the shareholders as per their shareholding.

File a Final Account and Report: Prepare and file a final account and report with the OCR, outlining the company's financial position and the distribution of assets.

Obtain a Dissolution Certificate: Upon completion of all formalities and verification by the OCR, a dissolution certificate will be issued, officially dissolving the company.

Closing a Public Company in Nepal

Steps to Close a Public Company in Nepal:

Pass a Resolution for Liquidation: The company's board of directors passes a resolution to voluntarily liquidate the company.

Apply for a Liquidation Order: Apply to a liquidation order with the court, providing reasons for liquidation and a proposed liquidation plan.

Appointment of a Liquidator: The court appoints a liquidator to oversee the liquidation process, manage the company's assets, and distribute them to creditors and shareholders.

Asset Realization and Debt Settlement: The liquidator sells the company's assets, pays off creditors, and distributes the remaining assets to shareholders.

Final Accounts and Report: Prepare and file final accounts and a report with the OCR and the court, detailing the liquidation process and asset distribution.

Conclusion:

Understanding "Private vs. Public Company: The Major Differences" is crucial for entrepreneurs and investors navigating the business landscape. The choice between private and public structures in Nepal involves weighing factors like ownership preferences and growth strategies.

Both have distinct advantages and challenges, influencing decisions on capital, transparency, and control. Understanding the details is essential for informed and prosperous business operations, regardless of whether a private venture or public listing is selected. For more information, contact your business consultant in Nepal.