Cambridge AS A Level Business Studies/ ZIMSEC Advanced Level Business Studies/ Business Enterprise Skills Notes: Types of businesses: Public Limited Companies
- There are generally two forms of limited liability companies:
- Private limited companies and
- Public limited companies
- In this post, we will examine the features, advantages and disadvantages of public limited companies
Features of public limited companies
- Is a limited liability company whose shares can be bought and sold publicly on the stock exchange, for example, the Zimbabwe Stock Exchange (ZSE), the London Stock Exchange, Johannesburg Stock Exchange etc
- While most shares of most public limited companies are traded on stock exchanges this is not a legal requirement in most jurisdictions (countries including Zimbabwe)
- A public company whose shares are traded on an exchange e.g ZSE is known as a listed company
- If a public company’s shares are not listed on any exchange the company is known as an unlisted company
- The company is treated as a separate juristic person (legal entity) at law
- This means the company can sue or be sued in its own name as well as engage in legal contracts in its own name
- The number of its shareholders is unlimited i.e. the company can have between 2-∞ (unlimited), shareholders
- Its external affairs (relationship with the outside world) are governed by are governed by the company’s Memorandum of Association
- Its internal affairs are governed by the company’s Articles of association
- In addition to being issued with a certificate of incorporation public limited companies need to conduct an Initial Public Offering (IPO)
- This is when the shares of the company are sold publicly for the first time
- In some countries, such as Zimbabwe, after a successful IPO, the company is issued with a certificate of trading so that it can commence operations
- Public companies also usually have a minimum amount Issued Share Capital that they are supposed to meet
- Public limited companies are also required by law to hire external auditors at least once annually
- Shareholders can elect a Board of Directors during the Annual General Meeting (AGM) to operate the business on their behalf.
- The name usually ends with the words Public Limited Company (PLC) or some other equivalent words
- It is registered under the Companies Act as in Zimbabwe and the UK or similar laws in other countries
- Shareholders are free to sell their shares on the Stock Exchange and do not need to consult fellow shareholders
- While it is possible in some countries to form a public limited company from scratch that is not usually the norm
- Usually, Public Limited companies are formed when private companies go public
Advantages of public limited companies
- Can raise more capital when compared to private limited companies
- Have limited liability which means they cannot lose private assets in settlement of company debts.
- There is continuity after the death of a member.
- Enjoy economies of scale
- Shareholders can freely sell their shares without consulting anyone.
Disadvantages of public limited companies
- There is risk of loss of control and hostile takeovers as shares are freely traded
- They are required to publish their accounts which may give competitors an insight into their more confidential operations
- Decision making is complex and convoluted because a lot of shareholders have to be consulted especially when it comes to big decisions
- The value of shares on the stock exchange weigh on the decisions of the company’s leadership and might force the company to take a short term look
- Complex formation procedures difficult requirements, for example, a company has to first trade for five years before it is allowed to list of the Zimbabwe Stock Exchange
- Are required to hire external auditors which add to the expenses of running a company.
- They suffer from Dis-economies of scale especially as they grow large
To access more topics go to the Advanced Level Business Studies page
To access more topics go to the ZIMSEC Business Enterprise and Skills page
To access more topics go to the Cambridge AS A Level Business Studies page
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