Public Limited Company Advantages and Disadvantages
Many entrepreneurs are tempted to open a public limited company—this is understandable. The title often grants reputational prestige and additional protections. However, more work is involved in maintaining a business on the London Stock Exchange.
A private company is fully owned by its executives. As such, there is only one group to please. Publicly traded companies act on behalf of multiple groups, often complicating decision-making processes.
- A public limited company is a business structure that allows members of the general public to hold shares.
- One of the biggest public limited company advantages is protection from liabilities and debt.
- One of the largest disadvantages is less control and more expectations to meet.
- Be sure to weigh public limited company advantages and disadvantages before you decide to open one.
In this article, we’ll cover:
- What is a Public Limited Company?
- Advantages of Public Limited Company
- Disadvantages of Public Limited Company
- Frequently Asked Questions
What is a Public Limited Company?
A public limited company (PLC) is a company with limited liability and shares that the general public can purchase. They are also known as publicly traded companies.
A PLC’s shares are sold on the stock market and may be claimed privately, during the initial public offering, or on the market.
PLCs may or may not publicly list their shares on the stock exchange. The company directors make this decision when they become public. If listed, anyone can buy the PLC’s shares. If not, shareholder opportunities are limited to certain groups.
A public organisation must add “PLC” to its company name to let potential shareholders and legal and investment professionals know they are publicly traded. All companies must receive a trading certificate from Companies House before becoming public.
Advantages of Public Limited Company
Greater Access to Capital
PLCs have more opportunities to raise money because the public can invest in them. The more a public company appeals to shareholders, the more money they’ll make from investments and mutual funds.
They also have a higher chance of obtaining favourable interest rates and loan repayments. Directors may further raise funds by issuing bonds or debentures on the stock market.
Transferability of Shares
Private companies also have shares. However, there are more restrictions on who can buy them. With a public limited company, selling and purchasing shares is much easier.
This makes more potential investors willing to buy and ensures that shares are not overly bound to certain people.
A public corporation exists as a legal entity separate from its owners, protecting it from liabilities and debt. For instance, if the company’s owner is in debt, that same debt will not apply to the public company. This is to prevent the debt from being passed to investors.
Credibility and Prestige
In some ways, being publicly traded is free publicity. More people will be aware of a business listed on the stock exchange. This leads to more brand awareness, sales, and investments. Furthermore, people are likely to trust a company with “PLC” in its name.
Less Risk Involved
The more shareholders a PLC has, the more risk is spread across shareholders. This is why many businesses prefer a large number of shareholders over a select few angel investors. The more risk is spread, the less risk there is for individuals involved.
Banks are more willing to extend finance to a public limited company than a private company. This is largely due to the lower risk of investing.
Smaller private companies tend to be more volatile, and PLCs are generally more established. More financial support from banks will facilitate growth and help the company expand to new markets.
Disadvantages of Public Limited Company
More Regulations and Compliance
PLCs are a separate legal body. As such, they’re subject to regulations not seen with private companies. For example, PLCs need at least two directors and must have their accounts audited. This is mainly to ensure shareholder expectations are continually met.
Loss of Control
Business owners somewhat lose control of the company when it goes public. PLCs are bound to legal regulations, which leads to less flexibility in business decisions. Financial institutions and shareholders also become partial owners and must be considered in any decision.
Constantly maintaining expectations often leads to short-termism. This means that PLCs are frequently focused on short-term results at the expense of long-term ones. Pleasing institutional shareholders while planning long-term strategies is difficult to balance.
Complexity And Cost Of Financial Reporting
Keeping financial reports in check takes more work with a PLC. Many executives must hire a new company secretary just to keep everything in line. This takes more time and may lead to higher overhead costs.
An online accounting software tool like FreshBooks simplifies this complex process. You may also check our Accountant Near Me page to find an affordable accountant who understands the unique needs of a PLC.
Risk of Hostile Takeovers
If a public limited company has financial difficulties, its share price will decrease, making it more attractive on the stock exchange.
This may seem like an advantage, but it comes with the risk of a bidder takeover. One bidder may buy most of the company’s shares and gain significant business control.
Increased Disclosure Requirements
Existing shareholders must always know what public companies are planning. PLCs must publish their financial reports and annual accounts within 6 months of fiscal year-end. They also must hold annual general meetings to keep all shareholders informed.
Opening a public limited company is a big decision and not the right one for everyone. While there are significant advantages, the disadvantages may outweigh the good for some people.
Hopefully, this guide gave you a brief idea of the advantages and disadvantages so you can make a more informed decision.
FAQs on PLC Advantages and Disadvantages
What is the minimum share capital requirement for a Public Limited Company in the UK?
A public limited company in the UK’s minimum nominal share capital is £50,000. Shareholders must pay 25% of their share value to the business. For instance, if a shareholder invests £10,000, £2,500 goes to the company. These amounts contribute to the £50,000 minimum.
How does a Public Limited Company differ from a Private Limited Company in terms of ownership and management?
Executives fully own private limited companies. A public company is partially owned by executives and partially owned by shareholders. This means both groups have a stake in the company’s business decisions and financial health.
How do Public Limited Companies raise capital and finance their operations?
Raising capital is often easier for a public limited company than for a private one. This is because they earn through investments as well as sales.
Shareholders may be individuals or business partners. Banks and other financial institutions are also more willing to lend the company money.
How is the liability of shareholders limited in a Public Limited Company?
A shareholder’s liabilities are determined by the amount they invested. The exception is if a shareholder personally guarantees a loan. In this case, the shareholder is fully responsible for paying what’s owed if, for any reason, the company cannot.
Can a Public Limited Company convert to a Private Limited Company or vice versa?
A private company may convert to a public one. Most public organisations began this way. It’s less common for a public limited company to become private. However, it is possible. This situation is usually the result of a bidder takeover.