What Is a Public Limited Company?
In 2021, 422 European companies raised 75 billion euros in IPOs, according to PWC’s IPO Watch. Naturally, numbers like these make business owners want to go public, but there is a lot you need to know before that.
First, what is a public limited company and what does it mean to be a PLC?
After Snapchat’s initial public offering (IPO) in 2017, CEO Evan Spiegel was asked what advice he could pass on from his experience. His answer? “Don’t go public.” It might seem counterintuitive, so to understand it, let’s dive deep into the world of limited companies and IPOs.
Public limited company: definition
A PLC is a company that has limited liability and has offered its shares to the general public. In the UK, a company must have a minimum share capital of £50,000 by law to qualify as a PLC.
This definition has four critical terms that we will further explore.
A company, or a corporation in the U.S., is defined as “an artificial being, invisible and intangible, that exists only in contemplation of the law.” This makes the company a separate legal entity from its owners.
A company can own and rent property, run a business, hire staff, and more. However, it requires a board of directors to run its affairs.
A public company is one whose shares are traded freely. This is usually done by listing the company on a stock exchange such as the London Stock Exchange (LSE). However, some PLCs remain unlisted for various reasons.
By selling all or a portion of itself to the public through shares, a public company raises large amounts of funds for expansion or to recover from debt.
A share is a unit of ownership in the company. Owning stocks (shares) makes a holder part-owner of the company. If you owned 1000 shares in a company that issued a total of 10,000 shares, you have 10% equity in that company.
All public limited companies must have the suffix “PLC” in their formal names. In the US, the equivalent of a PLC is the corporation, designated by an “Inc.” suffix.
“Limited liability company”
The United Kingdom Companies Act 2006 c. 46 Part 1 says that a public company is “limited by shares or limited by guarantee.” The concept of limited liability means that shareholders are only responsible for the company’s obligations to limit the value of their shares.
Shareholders and owners of any limited company are protected from being held personally responsible for losses and debts made by the company unless they had issued personal guarantees against loans.
The opposite of limited liability is unlimited liability, in which owners and partners have full legal responsibility for business debts. In most cases, this UK PLC framework is used in its commonwealth.
Examples of public limited companies
Every company on a stock exchange such as the LSE is a public limited company. One example is Rolls-Royce Holding PLC, the maker of Rolls Royce luxury cars.
Rolls Royce is a British multinational company trading under the ticker RR, with a share price of £118.02 at the time of writing.
Another example of a PLC is the French multinational Schneider Electric SE. The SE stands for Societas Europaea, the EU’s equivalent of a public company which means “European Company” in Latin. At writing, Schneider Electric shares were trading at 146.72 euros.
Is a limited company private or public?
A limited company can be private or public depending on who owns the shares. Any member of the public can own the shares of a PLC, while a private limited company (designated by the suffix LTD) restricts its shareholding to private owners.
However, both types of companies are limited and exist as separate legal entities from the owners.
There are many differences between PLCs and private limited companies:
- A PLC’s shares are traded publicly and freely while a private company’s shares are not traded publicly
- A public company must have at least two directors by law, while a private company only needs one
- Public companies must have a company secretary, while LTDs don’t need one
- Public companies must publish their financial statements and hold annual general meetings open to all shareholders, while private companies do not
- Both types of companies may or may not have Articles of Association, but private companies can draft their own Articles
What Is the difference between a limited company and a public limited company?
A limited company can be private or public depending on which provisions of the law it is framed under.
All limited companies have some common features:
- They are separate persons legally and can own property, have employees or be sued in their own right
- The company’s owners and partners enjoy limited liability
- Both types of companies have to pay corporation tax
- Both types of companies have to prepare annual accounts, keep records of all changes to their corporate structure, and maintain company addresses and signage
Due to their different legal frameworks, public companies have some advantages and disadvantages compared to private companies.
Public limited company advantages and disadvantages
Advantages of public limited companies
- The business can raise financing from the public through share capital
- Public companies are generally large, reputable, and well-established, so they have superior bargaining power
- Having many shareholders gives PLCs stability and insight into their management
- PLCs have unique networks and links to do business with other established business organisations or even governments
- In addition to limited liability, public companies provide further protection to owners because they have a larger pool of shareholders
- Because shares of PLCs are publicly traded, they enjoy better liquidity
Disadvantages of publicly traded companies
- Owners lose control when they take a company public. If more than 50% of the company goes public, majority shareholders can take over the company and even vote out the founders.
- Public companies are vulnerable to public sentiment in the stock market. Their share prices go up or down and make them vulnerable to collapse from external factors such as bad publicity.
- Public companies operate under stringent regulations and legal requirements. This includes making public announcements of financial performance.
- Public companies have to be audited regularly by external bodies, while private companies can apply for audit exemption.
When should businesses become public limited companies?
There are many milestones a business has to conquer before it is time to take it public. At the very least, it has to satisfy a long list of requirements to qualify for an IPO.
Some of these include:
- The company has had consistent and predictable revenue for some time. In other words, it has to become mature enough for the public market
- IPOs are expensive, so a company needs to have money for planning the IPO. It will need teams of lawyers, accountants, investment bankers, and other players
- The company must still have a lot of potential for further growth
- The company should be a major player in a particular market sector as a business
- Quality leadership – a strong management team with lots of experience is necessary to navigate the company through the next milestones
- It needs an established business process and values to pass investor scrutiny
- A very good debt-to-equity ratio
- A plan for the next several years explaining where the company is headed. Management should be able to project at least 25% growth within the next five to seven years
In some cases, the underwriters responsible for the IPO may demand minimum annual revenues of over £100,000.
Is it possible for a public limited company to become a private limited company?
Yes, a public limited company can convert into a private limited company if it obtains the consent of at least 75% of its shareholders.
This alteration of status is also possible if the company obtains a court order to reduce its capital or if it cancels its shares if they go below the minimum for a PLC.
These three processes are all known as “re-registration” of a company, but they all require the company’s share capital to be below the minimum of £50,000 for PLCs.To apply for re-registration in the UK, the company director has to complete an application form and deliver it to Companies House.
They also need to submit a copy of the special resolution to convert the company status, a court order, or a resolution of cancellation of shares depending on the reason for re-registration. Other documents required include copies of the company’s existing Articles of Association and the new Articles that will take effect after the change.
If the change is approved, Companies House will issue a new Certificate of Incorporation under the company’s new name and the date of the change. The public register will also be altered to reflect this change.
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