Advantages and Disadvantages of Public Limited Companies
It is no new business practice for business entities to op to incorporate their businesses into companies limited by shares rather than continuing to perform their duties as sole prorietorships, companies limited by guarantee, limited liability partnerships (LLP) or partnerships. Choosing to become a public limited company (PLC) is only but a natural business process when a business feels that there are more business benefits that could accrue to them through the PLC model than any other model.
However, before choosing to incorporate any business into a PLC, there a number of factors to consider before going ahead with the move. This means weighing the ups against the downs or the advantages over the disadvantages and understanding what they mean to your business. The need for a proper evaluation of the advantages and disadvantages is the reason why this article will centre its approach on them to shed some more light to any party that is interested in converting to a PLC.
Advantages of PLCs
This section will focus on the some of the most critical advantages that PLCs offer any other business model.
- Spreading risks while through widening the shareholder base
A PLC has a significant number of shareholders, who own a number of shares. The fact that there is a wide base of shareholders each holding shares, means that the risks of the company are spread to the shareholders. Therefore, if early investors choose to dump their shares in the company to achieve some profits, the company still remains with a considerable stake in the company without feeling a significant dent in operations.
On the other hand, a large base of investors eliminates the need to rely on one or two angel investors unlike many private companies choose to do. In some cases, these angel investors invest obscene amounts of expertise and capital to business thus have a tremendous influence over the private company and may choose to steer the company in a direction that that favours them.
- Increased growth and expansion opportunities
Converting to a PLC gives a company the ability to raise more capital and at the same time have access to readily available finance on better terms than other business models. This puts PLCs at a better position to:
- Organically grow to profitable heights.
- Pursue new markets, products and projects.
- Finance research and development that will contribute to the growth of the company.
- Make capital expenditure to not only support but also enhance its operations.
- Make acquisitions by whichever means necessary be it offering shares or by cash.
- Pay off or replace any existing debt with suitable terms.
- Access to more capital through public issue of shares
This is one of the most important reasons why businesses choose to convert to PLCs. This model enables companies raise more share capital, more so if the company has been listed an exchange that is recognised. The capital raised from public issue of shares is always more than what is raised by private companies because a significant number of the public buy in to the company. Other forms of investments like mutual funds or hedge funds could also be a possibility for PLCs that have stock listed on a recognised exchange.
- Transferability of shares
It is generally easy to transfer shares in a PLC than in private companies, which gives shareholders a chance to benefit from liquidity especially if there is a quote of the shares in the stock exchange. This is despite the fact that the markets will still rely on the availability of willing purchasers and sellers. The transferability of these shares gives shareholders some level of comfort because they do not feel bound to remain with the company. This makes it easy for such business models to deal with unfortunate events like a shareholder’s death, which will be transmitted in accordance with the terms of any will.
- It builds confidence and a prestigious profile
Just by the fact that a company has the suffix PLC at the end of its name already gives it some level of prestige. This gives the company a status that a private company may not quite match up to, which in turn builds the confidence of how the public view the company. How the public view the company will definitely influence the behaviour of employees, suppliers and most importantly, the customers. Furthermore, being listed on a recognised stock exchange will attract attention from investment professionals and the media that offers the company free publicity, which then drives more sales. The reinforcement of confidence and credibility is mainly achieved by:
- Greater levels of transparency especially with the books of accounts.
- Indirect endorsements just by virtue of listing shares on an exchange that is recognised.
- Having higher share capital requirements.
- Operating in a legal regime that is a stricter than those of private companies.
Disadvantages of PLCs
It is only normal for anything good to have its downsides. Here are some of the disadvantages of PLCs.
- More regulatory requirements
The regulatory and legal requirements surrounding PLCs are more onerous as compared to private companies to help cushion the shareholders. Some of these restrictions include:
- Holding AGMs is a must unlike in private companies where decisions are often made through resolutions.
- There is need for having at least two directors.
- Obtaining a trading certificate from the regulatory body.
- Higher transparency especially around the books of accounts.
- They are more vulnerable to takeovers
Hostile takeovers do happen and it is not new in this business model. It happens when a majority of the shareholders are in agreement to bid, which is facilitated by the fact that shares are transferable.
- The initial financial commitment for PLCs is higher
For PLCs, the minimum financial commitment that has to be made is higher as compared to that os a private limited company. Apart from the initial commitment, other associated costs especially in the formative stages are significantly higher especially when the company has complex requirements plus the need to pay investment and legal professionals to advise and manage the process of getting listed on the stock exchange.
- Issues over control and ownership
Many private limited companies are particular on the people then admit as shareholders to their companies, while ensuring that their plans and visions are in line with those of the company. Pre-emption rights enables private limited companies maintain some level of control over the affairs of the company, which is not the case with PLCs. It is more challenging to vet who chooses to buy into a PLC and to understand who the directors are accountable to. Therefore, the possibility of the initial founders and directors loosing control over the direction the company takes is higher since they may spend a lot of their time either managing shareholder expectations or facing disputes. Institutional shareholders on the other hand can use their level of influence to control the adoption of some standards or policies in return for their investment.
Many operations in PLCs are short-term in nature because of the added pressure that is imposed by the market against the expectations of investors to receive healthy returns. This puts a lot of emphasis on the share price that causes directors to just focus on delivering short-term results thus missing out on making some strategic long term opportunities or fail to recognise threats. This only means that the business fails to achieve the best results especially in the long run.
These are just but a few of the advantages and disadvantages of PLCs. Therefore, if you feel unsure of your best course of action, be sure seek the wise consult of an accountant or solicitor to give you detailed information you require depending on your needs.