Limited Companies II

Posted by Abd. Ghafar ARM

What is the difference between a public limited company and a private limited company?

The principle difference between a public limited company and a private limited company is that public limited companies can sell their shares to general public. In this way, they have access to virtually limitless funds that they can use to develop the business.

Because their shares can be bought by anyone, large public limited companies, such as Shell and General Motors, are amongst the largest businesses in the world with millions of shares owned by several hundred thousand shareholders. In practice, large financial institutions such as insurance companies and pension funds buy the majority of shares in successful public limited companies. The owners of public limited companies usually, therefore, have little involvement with – or interest in – the running of the company they own. As a limited company grows, therefore, the divorce of ownership from control becomes greater.

In order to offer their shares to the general public, companies that intend to become public limited companies must issue a prospectus describing the company and its prospect, and detail the offer of shares. Subsequently, the PLC must send a copy of its accounts and chairperson’s report to every shareholder each year and lodge its accounts with the Registrar of Companies.

After shares in a public limited company have been sold initially by the company, they can be traded freely on the stock market of the country in which the company is registered, although the company itself will gain no further money from this. The value of the shares on the stock market will reflect how well the company is performing. If the company performs well, its shares are likely to be thought of as a good investment. They will be in demand, and their value will rise. The value of shares is published daily in newspapers, and also on the internet. Public limited companies whose shares are available on the stock market are vulnerable to takeovers, which may result in the present directors losing control.

Why go public?

Most companies who decide to go public (become public limited companies) do so because this gives them access to an almost limitless source of capital. In reality the amount a business can raise depends on how well it is expected to do. Many businesses are able to fund expensive development and expansion programmers in this way.

The major disadvantage is that control of the businesses is divorced from those with an interest in the business itself. Most shareholders of public limited companies are mainly interested in the value of their shareholding and the dividend they receive. The senior directors of the business may be voted in or out at the next shareholders’ AGM, and must act in accordance with the wishes of the shareholders rather than the business itself.

In addition, companies whose shares are freely available on the stock market are liable to takeover, in which case all decision-making on the running of the business will pass into the hands of another company.

Summary

·         Limited companies are incorporated businesses that exist quite separately from their owners.

·         The owners of limited companies are called shareholders and have limited liability.

·         Private limited companies are not allowed to sell their shares to the general public.

·         Public limited companies are among the largest businesses in the world.

·         Public limited companies can sell their shares to the general public, which gives them access to vast source of capital.

·         The owners of public limited companies usually have little involvement in the running of the company.

Glossary

Private limited company: a limited company whose share cannot be sold to the general public.

Public limited companies (plc): a limited company whose shares can be freely bought and sold by members of the public.

Stock market: the market for shares in public limited companies.

Divorce of ownership from control: the delegation of direct control of a limited company from its owners (shareholders) to directors.   

Creditors: people or organization to whom money is owed.

Takeover: the purchase of one company by another: public limited companies are susceptible of this.

Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002