Private vs Public Company
It is a form of a company that trades its shares and stocks
Private vs. Public Company: An Overview
A UK public company, also referred to as a public limited company or a PLC, may trade its shares and stocks on a public stock exchange, which is available for the general public's access.
This article discusses UK business structures. For details on the differences between private and public companies in the US, please see the "public vs. private companies in the US" section at the end of this article.
In the US, the name "public" revolves around the concept that the firm sells a specific portion of the firm to the general public through the medium of stock exchanges.
These shares (unit of ownership) are traded on stock exchanges to brokers, dealers, and individual investors.
Although many shareholders own small ownership units in public limited companies, this doesn't imply that these shareholders necessarily control the firm.
However, these shareholders possess the right to vote for the members of the firm's board of directors, who are primarily responsible for the firm's day-to-day operations.
The world's major exchanges, such as the New York Stock Exchange, NASDAQ, and Shanghai Stock Exchange, trade thousands of publicly listed firm shares that individual investors can access.
But as we said above, public companies in the UK don't necessarily sell their shares - so what are the requirements for a British firm to be considered "public"?
Key Takeaways
- Limited firms known as public limited companies may, but are not required to, buy and sell their shares on exchanges.
- A form of business that is owned privately is referred to as a private corporation.
- The founders, the management, or a collection of individual investors frequently own a private corporation.
- The major benefit of public firms is their capacity to access the financial markets by issuing equity or debt securities to raise money (cash) for initiatives like growth and other ones.
- Small to medium-sized firms are often operated as private limited companies (LTD), and the responsibility of a private company's members is restricted to the number of shares they own.
What Are Public Limited Companies
As the name suggests, public limited companies (PLCs) are limited companies whose shares may but don't have to be, bought and sold on exchanges.
More importantly, they must meet several requirements:
- At least two shareholders, two registered directors, and a qualified company secretary
- Issuing share capital worth at least £50,000
- The firm's name must end with "PLC."
Public Company Limited by Shares: a company limited by shares refers to the structure where the firm's shareholders bear a "limited liability" (meaning that shareholders will not be liable to pay the firm's debts).
Moreover, the firm's board of directors is also not liable to repay the company's debts in the event of financial distress.
When a public company limited by shares is being put together, the total share capital of the firm, also known as the firm's equity, is equivalent to the sum of shares held by each shareholder.
These shares can be classified as fully paid, partly paid, or unpaid equity shares.
Since members' liability is limited to the number of shares held, holders of fully paid-up shares have no liability beyond the amount of their investment in the firm. That is to say, if an investor paid £300 for stock, nothing beyond that could be used to pay the firm's debts.
Moreover, this implies that the personal assets of the investors are not at risk. Such a company structure provides two key advantages: limited liability to the shareholders and higher growth potential.
Third-party investors are usually interested in this sort of company structure. It limits shareholders' liability and is usually a versatile investment because it permits investors to sell or purchase additional shares.
Advantages of Public Companies
There are several advantages to setting up a public limited company. The benefits of public companies are explained as follows:
1. Ability to raise capital by issuing shares
As a PLC is open to investments and can decide to list its stock, raising capital from the open markets is considered a competitive advantage for such firms.
The most common way of raising capital is by issuing shares in the primary markets through an initial public offering (IPO).
As public companies list their stocks on a recognized public exchange, members of the public and large investors alike can buy the public companies' stock/shares and become equity owners.
Since such firms can have unlimited shareholders, the potential for raising capital is endless.
2. Growth and Expansion Opportunities
As public limited companies have a high potential of raising large sums of capital by issuing shares on the stock exchange, the potential for growth and expansion opportunities in such firms is enormous.
Higher capital enables the firm to undertake new projects and invest the money in research and development activities, seize the opportunities for mergers and acquisitions, make capital expenditures, and minimize its risk of insolvency.
3. Minimizing risk
As public firms are allowed to raise capital in the open market, the firms have countless shareholders, which help to spread the risk across different individuals and thereby minimize individual risk.
This may allow early investors to sell some of their shares at a profit while retaining a substantial stake in the company.
Disadvantages of Public Corporations
However, public companies offer several advantages concerning risk, availability of information, etc.; the disadvantages of public companies are as follows:
1. Higher Regulatory Requirements
PLCs are exposed to increased inspections by the government and regulatory agencies. According to the law, such firms must fulfill specific requirements and criteria set by the government agencies like Companies House.
While most firms have to file with this body, public companies have more stringent filing and incorporation requirements.
For example, as mentioned before, public firms must appoint two directors in the firm and one secretary, while private companies only need a director.
2. Limited Flexibility in Possession and Management
With a non-public limited agency, the administrators or founders will commonly recognize the shareholders.
A non-public agency will regularly be selective over who to admit as a shareholder, ensuring they guide the business's imaginative and prescient plans.
With a limited public agency, it's much more difficult to govern who's a shareholder of the agency and to whom the administrators are, in the end, accountable.
There is consequently an opportunity that the original owners or administrators can lose control of the route of the agency, face disputes, or spend a lot more time managing shareholder expectations.
What is a Private Limited Company (LTD)?
A private company is a type firmly held under private ownership. This company may issue shares and have multiple shareholders, but these shares are not traded on open stock exchanges.
Private Limited Companies generally operate small to medium-sized businesses, and the liability of the members of a private company is limited to the number of shares held by them.
Although LTDs have advantages, raising capital for such firms can be challenging. As a result, many private companies decide to go public by issuing an IPO.
A private company can also issue shares and divide the equity among multiple shareholders, but these shares cannot be traded on a listed stock exchange.
Although both private and public firms perform similar functions, i.e., to produce goods and services to generate revenue, the key difference between the two structures is the issuance of company stock, financial disclosure obligations, and reporting requirements.
Private Company Limited by Shares
A private company limited by shares refers to that kind of structure where the shareholders of the firm bear limited liability, and the company's shares might not be offered to the general public as it is for public firms.
This structure originated in England, Northern Ireland, and Wales, and certain Commonwealth countries have adopted it in their laws.
Shareholders of such companies enjoy the benefits of limited liability, which implies that the shareholders' assets cannot be used to repay the company's debts, and their liability is only limited to the amount of capital invested.
Shares of such companies are not traded on the public stock exchanges, which is why such companies have to face a few regulation requirements from the government.
Since the shares of these companies are not traded on the financial markets, these companies have fewer shareholders than publicly listed companies. Therefore, the firm's owners enjoy a certain degree of flexibility in controlling and managing business operations.
Private Company Limited by Guarantee
This type of company structure aims to limit the liability of the investors to the amount that each has undertaken to contribute to the business' property if and when it is wound up (goes bankrupt).
As a guarantee is a fixed amount, the members only need to pay the guarantee when the business ends.
If the business activities end with debts greater than the amount of the guarantee, the shareholders are only liable for the guaranteed amount. Such firms cannot issue shares, and thus the investors do not have access to receiving periodic dividends.
Shareholders of such organizations cannot realize a profit from selling their shares. As a result, many commercial businesses generally do not incorporate this organizational structure.
This company structure provides an improved organizational setup and limited liability benefits. However, this structure also limits members to one vote. Hence, no one can acquire a controlling interest or vote in the organization.
A company limited by a guarantee can be classified into two categories: a small company limited by a contract and a company limited by a guarantee.
Members of such companies possess the right to access the company's register of members, company constitution, and meeting minutes. The above characteristics mean that the company is most suited for charity or not-for-profit business activities.
Advantages of Private Companies
The advantages of setting up a private company are as follows:
1. Fewer Regulations and Inspections
Private companies face fewer regulations than public companies that comply with an extensive set of rules devised by government agencies and go through frequent routine inspections by regulatory authorities.
Private firms are not required to publish financial reports, unlike public companies, which have to report their financial performance quarterly and annually. However, they still have to file accounts with the government.
2. Greater Flexibility in Ownership and Control
In private companies, the board of directors is generally the firm's main owner (shareholders). Thus, ownership and control decisions lie in the hands of the directors.
3. Ability to Pass Down the Business
Many companies opt to be private to continue the business under the same family name and retain ownership.
Going public means that the company will have to answer to many shareholders and thus might select a board of directors that are not immediate family members.
As a result, the ownership of the business can slip away from the family name.
Staying private implies that the firm can choose its board of directors which can include family members, and they can answer to only a few others due to the fewer shareholders.
Moreover, private firms can raise funds from individual funds and acquire businesses without selling a large part of their equity through an IPO.
Disadvantages of Private Companies
The disadvantages associated with setting up a private company are as follows:
1. Costly to Set Up
As the number of shareholders in a private company is not as large as the number of shareholders in a public company, each stakeholder has to contribute a larger amount to the business.
Furthermore, the initial regulatory and legal requirements to set up a private company are very high.
2. Little Reliable Valuation of the Firm
Since the private company's shares are not listed on a stock exchange, it is tough to ascertain the value of investing in the firm.
This makes it more difficult for firms interested in merging or acquiring private businesses and interested investors to research the company.
3. Lack of Public Confidence
Since private firms are not required by law to publish their financial reports regularly, the general public is unaware of the firm's business affairs, leading to lower confidence in its operations.
4 Restricted Access to Resources
As a private company cannot have more than 50 shareholders, its access to equity financing is lower than that of a public company.
As a result, the firm has less available capital and cannot access certain resources that can be crucial in providing a competitive advantage.
Public vs. Private Companies in the US
| Area | Private Company | Public Company |
|---|---|---|
| Ownership | A wholly owned company by private individuals and partnership firms | Shares are freely traded on a stock exchange |
| Sources of funding | Funds can be raised from private sources, debts, or other institutional investors. | Funds can be raised in the form of an issue of equity via IPO and debt. |
| Business Size | Size can be small, medium, or large, but often smaller than public companies. | Required to register upon holding $10 M of assets, having a class of equity, and 500 shareholders |
| Trading | Businesses are not listed on the stock exchange | Firms are listed on the stock exchange |
| Transfer of ownership | Transfer of shares is more restricted | No restriction on the transfer of shares from one person to another |
| Reporting | Some required filings, such as with the IRS - there are generally fewer applicable regulations. | Firms have to comply with SEC filing rules and file specific forms regularly and other forms for particular events. They also have to have an auditor issue an opinion on their financial statements. |
| Availability of Information | Less available information. | Their SEC filings are available through EDGAR to the public. |
Public Companies in America
In the United States, a company must make shares available for purchase by the public to be considered "public."
A few of the most successful publicly listed companies are Apple, Google, Coca-Cola, Tesla, etc.
The different types of private companies in America are:
1. Sole Proprietorship
It is a business firm that only one person holds, i.e., one firm owner.
Such owners have complete authority over business operations. Therefore, they bear unlimited liability, implying that the owner's assets can be used to pay off the firm's debts.
It is considered one of the easiest forms of business to establish, and a sole owner structure in a company allows for greater control over business operations.
However, due to the small size of the firms, it becomes difficult for such businesses to raise capital from the market.
2. Partnerships
A partnership refers to a business organization where two or more people enter a contract to oversee business operations and share profits and liabilities in proportion to their investment in the business.
Such business structures don't have to pay income tax as the individual members file taxes for the partnership with their taxes.
Since multiple people run the business, the firm can raise higher capital and access better business opportunities.
However, members bear unlimited liability, and conflicts can arise in partnership agreements due to differences in opinion.
3. Corporations
"Corporation" refers to a business structure identified as a separate business entity from its owners.
Being a separate legal entity, the firm acts as an individual and can thus enter into contracts, sue or be sued own assets, and pay taxes. On the other hand, corporations are owned by their shareholders, who bear limited liabilities.
The shareholders appoint a board of directors responsible for overseeing the business operations.
Some of the big firms around the world that are privately owned are Bloomberg, Fidelity Investments, Mars, etc.
Researched and Authored by Mehul Taparia
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