Advantages of forming a public limited company?
- Raising cash through a public stock offering - The opportunity to raise share capital is the most obvious advantage of being a public limited company, especially if the company is listed on a recognised exchange. Because it can offer its shares to the public and anyone can invest, the capital that can be raised is often far greater than that of a private limited company.
It is also likely that listing the stock on an exchange will attract investment from hedge funds, mutual funds, and other institutional traders.
- Increasing the number of shareholders and sharing risk - Offering shares to the general public allows you to spread the risk of firm ownership among a wide number of shareholders. This may allow early investors in the company to profitably sell part of their own shares while still holding a significant position in the company.
Obtaining funding from a diverse group of investors offers some advantages over relying solely on one or two "angel investors," as many private companies would do to promote growth. While an angel investor may bring significant funds and knowledge, the founders may be uneasy with the level of influence over the company's direction that the angel will frequently expect.
- Other financial options - A public limited business will often find itself in a better position when it comes to other potential sources of money, in addition to share capital.
Disadvantages of a public limited business
- Short-termism - When a public limited firm is listed, the market might exert additional pressure. The share price of a corporation symbolises its market value, and (possible) investors will often expect a substantial return. There will be a desire for the share price to rise in addition to dividends paid from profits.
This kind of emphasis on the share price, which is normally not as immediate in a private company, can cause the board to focus almost entirely on short-term results. As a result, they may overlook strategic possibilities or dangers, failing to achieve the greatest results for the company in the long run.
- More susceptible to takeovers - If a majority of shareholders consent to a bid, a corporation may become subject to a hostile takeover. Because shares are freely transferable, a potential bidder can accumulate a shareholding prior to initiating a bid effort.
- The initial financial commitment is greater - A public limited corporation requires a larger financial investment than a private limited corporation. To begin trading, the corporation must have at least £50,000 in nominal share capital, at least 25% of which must be paid up. That means at least £12,500 must be invested in the company, whereas in a private firm, a single share of (say) £0.01 might be issued — and not even paid for!
The costs of forming a corporation may also be expensive, especially if the organisation's requirements are complex.
If the company's stock is to be listed on a stock exchange, it will normally hire legal and investment professionals to advise and oversee the listing process. Other expenses will be incurred in order to receive a listing. Persona Finance [enquiries@personafinance.co.uk] can provide business and financial guidance.
