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:
  • 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

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