Public Limited Company: Definition, Features, Advantages, Disadvantages

A public limited company is a voluntary association of members that are incorporated and, therefore has a separate legal existence and the liability of whose members is limited.

Public limited companies are listed on the stock exchange where it’s share/stocks are traded publicly.

Its main features are;

  1. The company has separate legal existence apart from its members who compose it.
  2. Its formation, working and it’s winding up all its activities are strictly governed by rules, laws, and regulations.
  3. A company must have a minimum of seven members but there is no limit as regards the maximum number.
  4. The company collects Its capital by the sale of its shares and those who buy the shares are called the members. The amount so collected is called the share capital.
  5. The shares of a company are freely transferable and that too without the prior consent of other shareholders or subsequent notice to the company.
  6. The liability of a member of a company is limited to the face value of the shares he owns. Once he has paid the whole of the face value, he has no obligation to contribute anything to pay off the creditors of the company.
  7. The shareholders of a company do not have the right to participate in the day-to-day management of the business of a company. This ensures the separation of ownership from management. The power of decision making in a company is vested in the Board of Directors, and all policy decisions are taken at the Board level by the majority rule. This ensures the unity of direction in management.

As a company is an independent legal person, its existence is not affected by the death, retirement, or insolvency of any of its shareholders.

Advantages of Public Limited Company

A public limited company is a form of business organization that operates as a separate legal entity from its owners. It is formed and owned by shareholders.

Shares of a public limited company are listed and traded at a stock exchange market freely. Shareholders of a public limited company are limited to potentially lose only the amount they have paid for the shares they own.

So, some advantages of a public limited company are;

  • Led by Board of Directors
  • Limited Liability
  • Number of Members
  • Transferable shares
  • Life Span
  • Financial Privacy
  • Large Capital

Led by Board of Directors

Public limited companies are headed by a board of directors. The composition of the board of directors is set out in the company’s articles of association.

Normally it comprises a minimum number of two members and a maximum of 12.

These are elected from the shareholders by the shareholders during the annual general meeting. They act as the representatives of the shareholders in the management of the company.

Limited Liability

Shareholder liability for the losses of the company is limited to their share contribution only. This is what makes it a separate legal entity from its shareholders.

The business can be sued on its own and not involve its shareholders. The company does not belong to any person since one person can own only a part of it.

Number of Members

A public limited company has a minimum number of seven shareholders or members and a limitless number of members. It can have as many shareholders as its share capital can accommodate.

Transferable shares

Shares of a public limited company are bought and sold in a stock exchange market. They are freely transferable between its members and people trading in the stock exchange.

Life Span

A public limited company is not affected by the death of one of its shareholders, but her shares are transferred to the next of kin and the company continues to run its business as usual.

In the case of a director’s death, an election is held to replace the deceased director.

Financial Privacy

Public limited companies are strictly regulated and are required by law to publish their complete financial statements annually.

This ensures that they reveal their true financial position to their owners and potential investors so that they can determine the true worth of its shares.

Large Capital

Public limited companies enjoy an increased ability to raise capital since they can issue shares to the public through the stock market.

They can also raise additional capital by Issuing debentures and bonds through the same market from the public. Debentures and bonds are unsecured debts Issued to a company on the strength of its integrity and financial performance.

Disadvantages of a Public Limited Company

A Public Limited Company (PLC) means, first, that the firm is parceled out into shares and sold “publicly” on any or the entire globe’s stock exchanges.

Secondly, it means that those who invest in the firm are protected from extreme loss if the company fails.

This is called “limited liability.” This means that if one invests in a firm that fails, only that investment money can be claimed by the firm’s creditors.

More abstractly, “limited” means that only the existing assets of the firm can be seized for the payment of a debt.

So, some disadvantages of a public limited company are;

  • High Costs.
  • Public Books.
  • Greedy Shareholders.
  • Takeover.
  • Power.
  • Slow Decisions.

High Costs

A Public Limited Company is normally a complex thing to start. The firm banker (or “underwriter”) then offers the initial shares to the public (and keeps a substantial commission).

Often, the costs of setting up a public firm and Initial Public Offering (IPO) can run into hundreds of thousands of dollars.

Public Books

The term “public” here is to be taken literally. Once a firm goes public, the firm is open to public inspection. The financial books and records of the firm are open to anyone, allowing the competition to see precisely how much profit or loss the firm is experiencing.

Greedy Shareholders

Those who buy shares have no particular interest in the firm except in that it makes a quick buck.

Most companies, however, have an interest in laying out a long­term growth plan that takes patience and planning It is not often many shareholders see it this way.

Takeover

Since the company is now “public,” anyone can buy up shares, and there is no limit as to how many shares one can buy.

Under certain circumstances, hostile investors might buy up a large amount of stock, giving them a strong voice on the board of dimeters.

In this case, a firm that was built up by one group (or poison) can now be taken over by others since the firm has gone public

Power

Going “public” means a certain lack of control by the founders of the firm. In some cases, the firm can be controlled by a board of directors who do not necessarily have the time for hands-on business management.

Therefore, ownership can be separated from control. If this is the case, then those who control the business do not own it and do not see a profit. This is not an incentive (necessarily) to rational management.

Slow Decisions

If the company is public, it must have a board of directors representing the main and most powerful stockholders.

This means, in turn, that major decisions must go through the board, with debates and voting. In reality, this entails that decisions will be slow and often painful. Sometimes, they might not be made at all.

What is the Difference between Private and Public Limited Company?

What is the Difference between Private and Public Limited Company?

The main difference between a private and public company is that public company is allowed to raise capital by selling shares on the stock exchange, where private limiteds are not allowed to publicly traded stock.

Even though both private and public limited companies types are registered and incorporated under the same Company Act.

Common differences between a private and public limited company are;

FeaturesPrivate Limited CompanyPublic Limited Company
Minimum number of members27
Maximum number of members50Unlimited
Number of DirectorsAt least 2At least 3
Transferability of sharesComplete restrictionThere is no restriction.
Issue of ProspectusProhibitedCan issue a Prospectus.
Consent of the directorsThere is no need to give the consent by the directors of a Private CompanyDirectors of a Public Company must have a file with the Registrar consent to act as Director of the company.
Qualification sharesThe Directors of a Private Company need not sign an undertaking to acquire the qualification sharesDirectors of a Public Company are required to sign an undertaking to acquire the qualification shares of the public Company.
Commencement of BusinessA Private Company can commence its business immediately after its incorporationa Public Company cannot start its business until a Certificate to commencement of business is issued to it.
Shares WarrantsA Private Company cannot issue Share Warrants against its fully paid sharesPublic Company is free to invite the public for subscription i.e., a Public Company can issue a Prospectus.
Further issue of sharesA Private Company need not offer the further issue of shares to its existing shareholders

Public Company has to offer the further issue of shares to its existing shareholders as the right shares.

Further issues of shares can only be an offer to the general public with the approval of the existing shareholders in the general meeting of the shareholders only

Statutory meetingHas no obligation to call the Statutory MeetingMust call its statutory Meeting and file a Statutory Report with the Register of Companies
Quorum2 members present

5 members must be present personally

(However, the Articles of Association may provide and several members more than the required under the Act.)

Following are the main distinction between a public company and a private company:-

Minimum number of members

The minimum number of members required to form a private company is 2, whereas a Public Company requires at least 7 members.

Maximum number of members

The maximum number of members in a Private Company is restricted to 50; there is no restriction of a maximum number of members in a Public Company.

Transferability of shares

There is a complete restriction on the transferability of the shares of a private Company through its Articles of Association, whereas there is no restriction on the transferability of the shares of a public company

4 Issue of Prospectus

A Private Company is prohibited from inviting the public for the subscription of its shares, i.e. a Private Company cannot issue Prospectus, whereas a Public Company is free to invite public for subscription i.e., a Public Company can issue a Prospectus.

Number of Directors

A Private Company may have 2 directors to manage the affairs of the company, whereas a Public. A company must have at least 3 directors.

Consent of the directors

There is no need to give the consent by the directors of a Private Company, whereas the Directors of a Public Company must have a file with the Registrar consent to act as Director of the company.

Qualification shares

The Directors of a Private Company need not sign an undertaking to acquire the qualification shares, whereas the Directors of a Public Company are required to sign an undertaking to acquire the qualification shares of the public Company.

Commencement of Business

A Private Company can commence its business immediately after its incorporation, whereas a Private Company cannot start its business until a Certificate to commencement of business is issued to it.

Shares Warrants

A Private Company cannot issue Share Warrants against its fully paid shares, whereas a Private Company can issue Share Warrants against its fully paid-up shares.

Further issue of shares

A Private Company need not offer the further issue of shares to its existing shareholders, whereas a Public Company has to offer the further issue of shares to its existing shareholders as right shares.

Further issues of shares can only be an offer to the general public with the approval of the existing shareholders in the general meeting of the shareholders only.

Statutory meeting

A Private Company has no obligation to call the Statutory Meeting of the member, whereas Public Company must call its statutory Meeting and file Statutory Report with the Register of Companies.

Quorum

The quorum in the case of a Private Company is 2 members present personally, whereas in the case of a Public Company 5 members must be present personally to constitute a quorum.

However, the Articles of Association may provide and several members more than the required under the Act.

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