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Alan Moser and Stephanie Philips operate a successful software business in Brisbane. Alan and Stephanie are existing clients of your accounting firm CPT Accountants. Their business currently operates as a partnership but due to expansion plans they are considering incorporating the business (ie becoming a company). They wish to clarify the following points before making a decision and have asked CPT accountants to write a report answering the following:

What is the difference between forming a proprietary (private) company and public company?

There is substantial difference in the reporting requirements and tax basis for private and public companies. However, the biggest difference is how the legal entities deal with liability. Under a sole proprietorship and a partnership the owner can be held liable for many different problems that the business incurs while under a public model the company's owners have a limited liability. This offers the investors in a public company a line of protection from being personally liable for any of the businesses activities. For example, if someone tripped and fell due to some kind of negligence and sued the company, then under the private model the owners personal assets could be subject to compensation but in the private model the company's owners would be protected from the legal action. Therefore the public company model can help protect personal assets which are one of the major advantages to this form of ownership.

Another difference is that ownership is generally easier to transfer in a public company vs. A private one. Generally in public companies there will be some share that can be bought and sold that represents owners' equity and larger companies can be traded on a market. However, even the smaller public companies must issue shares even if they are not traded on a public market. This also makes it easier to buy and sell them as opposed to a private or proprietary company. Proprietary companies will have to establish a value for the business based on the financial statements and goodwill where as a market can establish share prices quicker and easier for ownership.

2. What regulation applies to a proprietary (private) company vs. A public company?

The regulations are definitely stricter for a public company than a private company. One of the primary reasons is that a public company must open its books to everyone while a private company only has to deal with auditors if necessary and their tax authorities. Since the public companies have to share their financial information then they must present them in a way that follows a standardized accounting of their financial position.

There are also many rules and regulations that govern the process of buying and selling shares in a public company as well. A public company is not able to discriminate on its ownership based on various factors and therefore must make ownership generally accessible to the public. This is not the case in private ownership and the owners can determine ownership privileges as they personally see fit. Therefore the public model is definitely more complex because it must provide transparency, access, and follow the rules of ownership transfer. Also, public companies must allow the owners a way to vote on the leadership and the board of directors of the company while private companies can make these decisions as they see fit.

3. Are there any differences between issuing ordinary and preference shares and what are the different forms/characteristics possible with preference shares?