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:
1. Additional regulatory requirements
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. This appointment is optional for a private company
There are higher transparency requirements for company accounts. They must also be produced within six months of the end of the financial year. For private companies, nine months are available.
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.
2. Higher levels of transparency required
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.
Public limited companies will need to have their accounts audited. They are also 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. This information which is then available to anyone who wishes to access it, including competitors.
The accounts of public limited companies are often scrutinised more by analysts. They are more likely to receive media commentary, not all of which may be positive or welcome.
3. Ownership and control issues
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. This can help to ensure new shareholders support an existing 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. Shareholder disputes may be difficult to manage. The founds may find themselves investing a lot more time managing shareholder expectations.
Institutional shareholders can wield particularly high levels of influence. They will often expect consultation and adoption of particular policies or standards in return for their investment.
4. More vulnerable to takeovers
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.
5. Short-termism
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. 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 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. In private companies, there is usually less focus on the current share price, even to the extent one is available.
6. Initial financial commitment is higher
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 this must be 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.
All companies and LLPs are required to maintain up to date statutory records. Inform Direct is the perfect tool to keep your unlisted public limited company’s records up to date.
