What Is a Public Company?

Updated 19 May 2020

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A public company is a company whose shares are available to be purchased on the open market, usually one of the major stock markets.

In the UK, public companies are denoted by the acronym PLC after the name of the company: for example, J Sainsburys PLC. PLC stands for public limited company.

The ‘limited’ in 'public limited company' refers to the limitation of liability. This has two primary consequences:

  • Shareholders can only lose what they invest and are not liable for further losses of the company.

  • Shareholders cannot be legally pursued for debts, fraud allegations or similar liability, except where the shareholder is a board member.

In other jurisdictions, such as the US, public companies may also be referred to as a ‘publicly traded company’, ‘publicly held company’ or ‘publicly listed company’.

The overall definition – that the shares are available to be purchased by the public – remains the same, but the specific designations vary according to the legal system to which it belongs. This article focuses on the UK specifics of a PLC.

How Do Private and Public Companies Differ?

Companies can either be public or private. There are key differences between the two:

  • A private company is a company that is not listed on any stock exchange. Its shares are traded or exchanged through a private arrangement with the shareholders.

  • Private companies in the UK are denoted with 'Ltd' or 'Limited' after their name, which means 'limited company'. Once again, the term 'limited' refers to limited liability.

  • In the UK, a public company must have a minimum allocated share capital of £50,000, whereas there is no requirement for a private company to have a minimum.

Despite not being required to have a minimum share capital, private companies can be large corporations, often larger than a PLC. While a private company cannot raise funds by public shares, it can take loans and use shares to attract investors.

Key differences between public and private companies also include regulatory and reporting requirements.

  • A public company must have a minimum of two shareholders, whereas a private company only legally requires one. Likewise, a public company requires a minimum of two directors, whereas a private company only requires one.

  • Private companies have nine months after year-end to file their tax return, whereas public companies only have six months.

  • A public company must have a qualified company secretary. This means the company secretary must have gained a company secretary qualification from ICSA, The Chartered Governance Institute. There is no requirement for a private company to have a qualified company secretary. Despite the title, the role is not a secretarial or clerical role; the company secretary is responsible for the efficient administration of a company.

Pros and Cons of Public Companies

Most public companies were private companies that went public to raise capital. With this ability to raise large sums of money comes additional reporting requirements and public scrutiny.

In the UK, continuing obligations are imposed by the Financial Conduct Authority (FCA) and the London Stock Exchange, including specific disclosures which must be made in its annual report.

Pros

  • By selling shares, public limited companies can usually raise more capital than private limited companies.

  • By selling shares, the number of shareholders is greater and therefore any risk is shared. Many shareholders widen influence and make it easier to transfer shares.

  • The ability to raise larger sums of capital means that the company is in a better position to grow or finance multiple projects. This can put the company in an advantageous position strategically in its market.

  • Creditworthiness is perceived to be better in public companies, so it may be easier for the company to acquire a loan or alternative financing.

  • Public perception of the company increases and the population at large are more likely to have heard of the company, leading to increased brand recognition and, often, sales.

Cons

  • There are additional requirements for a public company, including time frames for reporting, more transparency around accounts and additional restrictions on share capital, as well as limits on pre-emption rights and dividends.

  • Accounts must be audited and public companies must publicly file full accounts rather than abbreviated ones. In turn, this means public companies receive more scrutiny, particularly from analysts and the financial media.

  • A public company will not know the shareholders and this may lead to issues where the company spends time dealing with shareholder issues. It is also more vulnerable to takeovers, where a bidder can build up the required shareholding in advance.

  • As noted above, the initial financial commitment is larger. To be a public company, there must be at least £50,000 of nominal share capital.

How Are Public Companies Formed?

When a company first goes public and is listed on the stock exchange, an investment bank will use valuation techniques to determine a company’s value, how many shares to be offered to the public and at what price. This is known as an Initial Public Offering (or IPO) and determines a company’s market cap.

The process of going through an IPO is known as ‘floating’ or ‘going public’.

Before the IPO happens, details of the offering are made available to potential shareholders. This document is known as a prospectus.

After a company files the proposed offering, there is a period where it will face intense scrutiny of its finance and leadership from potential investors as well as the financial media. Scrutiny will include consideration of the business model, proposed valuation, complex structure, governance and leadership behaviour.

If investor interest is not as anticipated due to concerns raised during this period, this may affect the assessed value of the company and in some cases, can lead to a delayed IPO.

Why Public Companies Might Revert to Private

Companies do not have to remain public companies and when the cost of remaining a public company outweighs the benefits, it can choose to return to trading as a private company. This might be due to:

  • The pressure of declaring results
  • Public scrutiny
  • A wish to return to the greater freedoms of a private company
  • The company might be acquired by a private company

When this happens, the company voluntarily applies to be delisted from the stock market. This is a similar process to when a company is involuntarily delisted for failing to meet the minimum standards set by an exchange.

Final Thoughts

The governance of Companies House and the Listing Rule requirements of the London Stock Exchange are extensive and can be restrictive, but for many companies, the benefits brought by a listing on the stock exchange are worth it.

It is, however, a common misconception that public companies have larger revenue than private companies. Many companies decide the benefits of being a public company cost too much and the benefits of remaining (or returning) to a private company outweigh those of being public.

Further Reading

You might be interested in these other WikiJob articles:

Types of Equities and Their Risk Profiles

Types of Bonds and Their Risk Profiles

Investment Banking: An Overview

Mergers and Acquisitions