Public vs Private Companies: Key Legal Differences For Startups And SMEs

When you’re building a startup or growing an SME, it’s easy to think “a company is a company” - until you start talking to investors, signing bigger contracts, or planning your next phase of growth.

That’s where the question of public vs private companies becomes more than a technical detail. In Australia, the legal differences between public and private companies affect how you raise money, who can own shares, what you must report, how governance works, and even what your company must be called in formal documents.

If you’re weighing up whether to incorporate (or you’re already a proprietary company and thinking about scaling), this guide breaks down the key legal differences in plain English, from a small business perspective.

What Is A Private Company (Proprietary Limited) In Australia?

In Australia, a “private company” is usually a proprietary company - most commonly registered as a Pty Ltd.

This is the structure most startups and SMEs use because it’s flexible, familiar to investors, and generally has fewer ongoing compliance obligations than a public company.

Key Features Of A Private Company

• Ownership is private: shares are held by founders, investors, employees (via equity arrangements), or other private parties.
• Restrictions on fundraising: proprietary companies generally can’t raise funds from the public by issuing shares (there are limited exceptions, but as a general rule it’s “private money” only).
• Often lower reporting burden: many proprietary companies won’t need to lodge audited financial reports with ASIC (though this depends on whether the company is “small” or “large”, and whether ASIC or shareholders require reporting).
• Often used for growth: it’s common to start as a Pty Ltd and only consider a public company structure later (if at all).

If you’re at the “let’s get this business set up properly” stage, a Company Set Up is often the cleanest starting point because it creates a separate legal entity (the company) that can contract, employ staff, and hold assets in its own name.

What Is A Public Company In Australia?

A public company in Australia is a company that can have a broader shareholder base and, in some cases, list on a stock exchange (though a public company doesn’t have to be listed to be “public”).

From a business owner’s perspective, the biggest practical difference when comparing public vs private is this: public companies are built for larger-scale ownership and capital raising, and they come with heavier compliance and governance expectations.

Key Features Of A Public Company

• Designed for wider investment: public companies can raise funds from the public (subject to strict rules).
• More corporate governance: generally greater expectations around transparency, shareholder communications, and board oversight.
• More reporting and compliance: public companies are generally required to prepare and lodge financial reports (and may have audit requirements), and listed entities also have additional disclosure obligations.

For most startups, registering as a public company from day one is uncommon - not impossible, but usually not necessary unless you have a very specific funding strategy or business model.

Public Vs Private: The Key Legal Differences That Matter For Small Businesses

Let’s get practical. Here are the legal differences between public and private companies that most directly impact startups and SMEs.

1) Fundraising And Share Offers

One of the most important differences between public vs private companies is how you can raise capital.

• Private (Pty Ltd): generally cannot offer shares to the public. Capital raising is typically done via private offers to known investors (e.g. sophisticated investors, professional investors, or existing networks), subject to the rules that apply to your specific situation.
• Public company: can raise funds from the public, but this usually involves higher regulatory requirements (and if you’re listing, an entirely different layer of obligations).

Many SMEs don’t actually need “public fundraising” to scale. Instead, they raise capital privately (friends/family, angels, VCs, strategic investors), or grow through revenue.

2) Number Of Shareholders

Proprietary companies have limits on the number of non-employee shareholders they can have (generally capped at 50). In broad terms, shareholders who hold shares under an employee share scheme are typically not counted toward that 50-person limit, and there are technical rules about how the count works in different situations.

Public companies are not subject to that proprietary company shareholder cap.

If you’re planning to bring in a larger number of investors over time, this is a key consideration - but for many startups, the early stages rarely require a wide shareholder base.

3) Disclosure And Reporting Burden

From a founder’s point of view, compliance load matters because it affects time, cost, and operational focus.

• Private companies: many proprietary companies won’t have to lodge financial reports with ASIC (particularly if they’re “small”), but some proprietary companies do have reporting obligations (for example, if they’re “large”, directed to report by ASIC, or required to report by shareholders in certain circumstances).
• Public companies: generally have more formal financial reporting obligations (including lodging financial reports with ASIC), and the compliance expectations tend to increase as the shareholder base widens. Listed public companies also have continuous disclosure and ASX-related obligations.

This is one reason “Pty Ltd” remains the default for founders: you get the benefit of a company structure without taking on a level of governance that doesn’t match your size yet.

4) Governance And Decision-Making Expectations

Both public and private companies must be run properly, and directors have legal duties either way. However, public companies often operate under more formal governance, especially where ownership is broader and management is more separated from shareholders.

In practical terms, that can mean more structured board processes, shareholder communications, and internal controls. Even if you’re private, it’s still smart to formalise decision-making early - particularly once you have co-founders or external investors.

For example, a tailored Shareholders Agreement can be the difference between a smooth growth journey and months of disputes about voting, exits, or who controls what.

5) Ability To Transfer Shares And Plan Exits

Whether you’re public or private, shares can generally be transferred - but the process and restrictions differ massively in practice.

Startups commonly restrict share transfers in their governing documents to protect the cap table (and avoid an unexpected third party becoming a shareholder). Public companies may have a more open approach to transferability depending on their structure and whether they are listed (for example, listed shares are typically freely tradeable on-market, subject to rules and restrictions that may apply in particular cases).

Even in a private company, share exits and transfers come up more often than founders expect - co-founder departures, employee equity, investor secondary sales, or family succession planning. If you’re anticipating any of that, it’s worth understanding the legal steps involved in transferring shares.

6) Company Name Requirements (Ltd vs Pty Ltd) And Signing Documents

This can feel minor, but it becomes very important when you’re signing major contracts (leases, supply agreements, finance documents, M&A paperwork) and the other side wants certainty they’re dealing with the right legal entity and that the contract is validly executed.

In Australia, the company’s name typically reflects its type:

• Proprietary limited company: usually includes “Pty Ltd” in its name.
• Public company limited by shares: usually includes “Ltd” in its name.

As a practical point, you’ll also often need to ensure your company details are correct across documents (for example, matching the registered company name and ACN, and where relevant using the right ABN/ACN disclosures on invoices, websites, and contracts).

On execution: companies in Australia often sign under specific rules set out in the Corporations Act (including the commonly used approach under section 127). These rules apply to companies generally (whether proprietary or public), and the “best” signing method can depend on how your company is set up (e.g. sole director, multiple directors, and whether there is a company secretary).

If you’re regularly signing higher-value contracts, it’s worth getting familiar with section 127 signing so you can set up signing processes that match how your company is structured and reduce enforceability risk.

Which Structure Makes Sense For Startups And SMEs?

Most founders asking “public vs private” are really asking a bigger question: what structure will help me grow without creating legal overhead I don’t need?

Here’s how we generally see it play out for small businesses.

When A Private Company Is Usually The Better Fit

• You’re early-stage: you want a simple structure to trade, invoice, hire, and protect personal assets.
• You’re raising capital privately: angels/VCs/strategic investors rather than the general public.
• You want more control over ownership: including restricting share transfers and managing who becomes a shareholder.
• You want a lighter compliance load: to keep admin manageable while you focus on growth.

This is why “Pty Ltd” is the standard for Australian startups and SMEs, especially where there’s more than one founder or there’s a plan to raise investment.

When A Public Company Might Make Sense

• You’re planning broad fundraising: and you need a structure that supports offers to the public (subject to the law).
• You’re aiming to list: or you’re positioning for a future IPO pathway (even if that’s several years away).
• You have a larger ownership base: and need a governance model that supports it.

For many SMEs, the real question isn’t “should we be public now?” - it’s “how do we set ourselves up privately so that going public later is possible if we choose that path?”

What Legal Documents Help You Run A Private Or Public Company Properly?

The structure you choose is important, but your documents are what make it work in real life.

Whether you’re private or public, good governance and well-drafted agreements help you:

• reduce co-founder and shareholder disputes
• raise capital more smoothly
• manage compliance and decision-making
• protect your brand and confidential information

Core Documents Many Startups And SMEs Need

• Company Constitution: your company’s internal rules (often used alongside or instead of replaceable rules). A tailored Company Constitution is especially useful where you want specific governance controls.
• Shareholders Agreement: sets out ownership, voting, decision-making, exits, and what happens if someone leaves or stops contributing (particularly important for co-founder businesses). A properly drafted Shareholders Agreement can save a huge amount of time and cost later.
• Employment Contracts: if you’re hiring staff, you’ll want clear terms around duties, pay, confidentiality, IP ownership, and termination. An Employment Contract helps set expectations and reduce risk from day one.
• Privacy Policy: if you collect personal information (common for online stores, SaaS, bookings, email lists), your compliance obligations increase. A tailored Privacy Policy can help you explain how data is collected, stored, and used.
• Customer Terms (or a Service Agreement): to set payment terms, limitations, scope, and dispute processes, especially if you provide services or subscription products.

Not every business needs every document immediately. But the bigger and more valuable your contracts and relationships become, the more important it is to formalise the legal foundations early.

Can You Convert From Private To Public Later (And What Should You Plan For Now)?

Yes - it’s possible to change from a proprietary company to a public company later. Many businesses effectively treat their early years as the “private build stage” and then consider a restructure when fundraising, acquisitions, or listing becomes a real (not hypothetical) next step.

That said, the smoother pathway is usually the one you prepare for before it becomes urgent.

Practical Ways To “Future-Proof” While Staying Private

• Get your cap table and share rights right early: messy ownership records and unclear share rights can delay investment and complicate exits.
• Think through share classes: if you plan to raise investment, you may need different rights for different shareholders (e.g. voting, dividends, conversion). This can come up in discussions about different classes of shares.
• Document director/shareholder decisions properly: this matters for due diligence, financings, and major contracts.
• Use contracts that match your scale: investor-ready agreements, strong customer terms, and employment documentation reduce risk and improve valuation discussions.

It’s also worth remembering that “going public” is not the only growth path. Many highly successful SMEs stay private permanently and still scale nationally (or internationally) by raising private capital, reinvesting profits, acquiring competitors, or using strategic partnerships.

Key Takeaways

• The public vs private company decision affects fundraising options, shareholder limits (for proprietary companies), reporting obligations, and governance requirements.
• Most startups and SMEs begin as a private (Pty Ltd) company because it offers limited liability, flexibility, and generally lighter compliance.
• A public company structure may suit businesses planning broad fundraising or listing, but it usually comes with more formal governance and reporting expectations.
• Regardless of structure, strong foundations like a Company Constitution, Shareholders Agreement, Employment Contracts, and a Privacy Policy help you operate confidently and reduce disputes.
• If “public one day” is part of your strategy, planning your shares, signing processes, and governance early can make future changes far easier.

Note: This article is general information only and does not constitute legal advice. For advice tailored to your business, you should speak with a lawyer.

If you’d like a consultation on choosing the right company structure (public vs private) and setting up the legal foundations for your startup or SME, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.