Advantages and disadvantages of a public limited company

Public limited company advantages

As a limited company, a plc shares the advantages of a limited company with its private counterpart. But there are also specific features of a public limited company, many of which reinforce one another, that give it some unique advantages:

The most obvious advantage of being a public limited company is the ability to raise share capital, particularly where the company is listed on a recognised exchange.

Since it can sell its shares to the public and anyone is able to invest their money, the capital that can be raised is typically much larger than a private limited company.

It’s also possible that having stock listed on an exchange could attract investment from hedge funds, mutual funds and other institutional traders.

Offering shares to the public gives the opportunity to spread the risk of company ownership among a large number of shareholders. This may allow early investors in the company to sell some of their own shares at a profit while still retaining a substantial stake in the company.

Obtaining capital from a wide range of investors has some advantages over relying on one or two “angel investors”, as many private companies will choose to do to facilitate growth. While an angel investor may provide a large amount of capital and expertise, the founders may not be comfortable with the level of influence over the company’s direction that the angel will often expect.

As well as share capital, a public limited company will often find itself in a better position when looking at other potential sources of finance.

The demands of being a public limited company and maintaining a stock exchange listing, for example, can help to improve a company’s creditworthiness when issuing corporate debt (and therefore reduces the return the company needs to offer investors).

Banks and other financial institutions may be more willing to extend finance to a public limited company, particularly one that is listed. The company could also be in a better position to negotiate favourable interest rates and repayment terms on loans.

The value of being able to raise finance is in how it can be employed to serve the business. By having more finance potentially more readily available and on better terms than a private company, the public limited company ican be in an advantaged position to:

• Pursue new projects, new products or new markets
• Make capital expenditure to support and enhance the business
• Make acquisitions (whether in cash or by offering shares to the shareholders of the target business)
• Fund research and development
• Pay off existing debt (or replace existing debt with new debt on better terms)
• Grow organically

Whether deserved or not, having ‘plc’ at the end of a company name can add standing and prestige. There is a sense of status about a public limited company that its private company counterpart just doesn’t quite have, which can affect how the business is viewed. While often more imagined than real, this perception of being more established, larger or more powerful can affect the behaviour of customers, suppliers and employees.

More people are likely to be aware of the company if it is public, particularly if it’s listed on a stock exchange. In that case, it’s more likely to receive attention from the media and investment professionals. This is effectively free publicity, meaning more people will recognise the company and its products or services. Better brand recognition can lead to more sales. It may also make you more visible to valuable potential business partners.

Credibility and confidence are reinforced by:

• Operating under a stricter legal regime than private companies in many areas
• Higher share capital requirements
• Greater transparency (for example, in the required form of accounts)
• For listed companies, the indirect endorsement of having their shares listed on a recognised exchange

Again, these factors can affect the behaviour of (potential) shareholders, customers and business partners.

The shares of a public limited company are more easily transferable than those in the private equivalent, meaning shareholders benefit from liquidity. If shares are quoted on a stock exchange, shareholders and potential shareholders will generally find it easier to transfer shares in the company – although the market still relies on willing purchasers and sellers being available.

The fact the shareholders are less bound to remain with the company can give them comfort – and may help the company by making people more willing to invest.

Without restrictions on transferability of shares that often apply in private companies, it’s also easier to deal with situations like a shareholder’s death, allowing shares to be transmitted in line with the terms of any will.

Going public can enhance the options for the founders to exit the business at some point in the future, if they wish to do so. Both higher transferability of shares and the increased visibility of the business and its performance may increase the chances of bid interest from potential suitors.

Public limited company disadvantages

There are some important disadvantages of a public limited company, compared to a private limited company. These public limited company disadvantages include:

To help protect shareholders, the legal and regulatory requirements for a public limited company are more onerous than for private limited companies. For example, additional restrictions include:

• A trading certificate must be obtained from Companies House before the company can trade (there is no such requirement for a private company)
• The need to have at least two directors (only one is required in a private company)
• More onerous rules apply concerning loans to directors
• A suitably qualified company secretary must be appointed (not required for a private company)
• As well as higher transparency around accounts, they must be produced within 6 months of the end of the financial year (9 months for private companies)
• AGMs must be held, whereas in a private company decisions can more often be made by resolution
• There are various additional restrictions on the company’s share capital and limits on pre-emption rights and dividends

If the company’s shares are listed, the company will also need to follow the rules of the market. These rules, particularly those to be listed on the London Stock Exchange, are demanding.

Understanding and applying these additional rules will consume time and effort that cannot then be dedicated to growing the business. Appointing staff or advisers – including the required company secretary – will help but come at a cost.

Limited companies, whether public or private, have more of their details in the public domain, available via Companies House, than other business types. But the required level of transparency is much higher for public companies.

As well as needing to have its accounts audited, public limited companies are generally unable to file abbreviated accounts, whereas smaller private companies can often do so. The fuller form of accounts means a public limited company has to disclose more detailed data about the business and its performance, information which is then available to anyone who wishes to access it.

The accounts of public limited companies are often scrutinised more by analysts and receive more media commentary.

With a private limited company, the shareholders will typically be people known to the directors or founders. A private company will often be selective over who to admit as a shareholder, ensuring they support the vision and plans for the business. The use of pre-emption rights can allow existing shareholders to maintain control over the company when a new share issue is undertaken, a shareholder dies or wants to transfer their shares.

With a public limited company, it’s much harder to control who is a shareholder of the company, and who the directors are ultimately accountable to. There is therefore a possibility that the original owners or directors can lose control of the direction of the company, face disputes or just spend a lot more time managing shareholder expectations.

Institutional shareholders can wield particularly high levels of influence, often expecting consultation and adoption of particular policies or standards in return for their investment.

At worst, a company can become vulnerable to a hostile takeover if a majority of shareholders agree to a bid. With shares being freely transferable, a potential bidder can build up a shareholding in advance of launching a bid attempt.

Where a public limited company is listed, there can be added pressure imposed by the market. The company’s share price represents the value of the company as viewed by the market, and (potential) investors will usually expect a healthy return. As well as dividends paid from profits, there will be a desire for the share price to increase.

This level of emphasis on the share price, usually not so immediate a demand in a private company, can cause the directors to focus almost exclusively on short-term results. They may therefore miss strategic opportunities or threats, thereby not achieving the best for the business in the long-term.

The minimum financial commitment is higher for a public limited company than for a private limited company. In order to trade, the plc must start with at least £50,000 of nominal share capital, at least 25% of which is paid up. That means at least £12,500 must be committed to the business, whereas in a private company a single share of (say) £0.01 could be allotted – and not even paid for on issue!

Associated costs of company formation may also be higher, especially if the company’s requirements are complex. If the company’s shares are to be listed on an exchange, it will typically pay legal and investment professionals to advise and manage the listing process. There will be other costs associated with obtaining a listing.