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What’s it? A public limited company (PLC) is a business organization in which the legal entity is separate from the owners, has limited liability, and is listed on the stock exchange. Generally, they are big companies. They are also known as a listed company or public company.
Owners can be individuals, companies, or other organizations. Often, we refer to them as shareholders.
Public limited companies have great resources and better access to larger capital, such as through rights issues or bond issues. Therefore, they can collect funds to grow the business rapidly.
However, companies must comply with the strict regulations of stock market regulators. In addition, they must disclose some critical information to the public, such as financial statements, which competitors can use to make decisions about appropriate strategies against the company.
In addition, owners can easily lose control when they lose 50% of the shares. When a company needs additional capital and sells new shares, the old shareholder’s holdings can be diluted.
Then, agency conflicts can also arise. For example, directors may act not in the owners’ interests when conducting business but rather pursue their own interests and profits.
Public limited company characteristics explained
Understanding the key characteristics of a public limited company (PLC) is crucial for students of business and management, investors, and anyone interested in how businesses operate. Here’s a breakdown of what defines a PLC:
Establishment and listing
Setting up a PLC is a more intricate process compared to forming simpler business structures. Stricter regulations and increased paperwork are part of the process to ensure investor protection and market stability.
Additionally, publicly traded companies must regularly publish various documents, such as audited financial statements and prospectuses outlining future plans and potential risks. These documents are mandated by stock market regulators to ensure transparency and provide investors with the information they need to make informed investment decisions.
Separate legal entity
A key characteristic of a PLC is its status as a distinct legal entity from its owners. This means the company itself, not the individual shareholders, is responsible for its debts and obligations.
Shareholders enjoy limited liability protection. Their personal assets, like homes and savings accounts, are shielded from claims against the business.
This separation of personal and business finances offers significant protection for investors, allowing them to participate in the potential upside of the company’s growth without risking their personal wealth in case of unforeseen challenges.
Capital
One of the most significant advantages of a PLC is its unique ability to raise vast sums of capital. PLCs achieve this by selling shares of ownership (stock) to the public on a stock exchange. These shares represent a proportional ownership stake in the company.
By attracting a large pool of investors, PLCs can raise significant capital that fuels ambitious growth strategies. In addition to issuing stock (equity financing), PLCs can also attract debt financing by issuing bonds.
Bonds are essentially loans made to the company by investors, with a promise of fixed interest payments and eventual repayment of the principal amount. This access to vast pools of capital empowers PLCs to invest in research and development, expand into new markets, or acquire other companies, propelling them towards significant growth.
Ownership and shareholders
A PLC must have at least two shareholders, unlike a sole proprietorship owned by a single individual. There is no upper limit on the number of investors who can hold shares in a PLC. This allows for a wider distribution of ownership and facilitates the raising of large amounts of capital.
Shareholders can freely buy and sell their shares (ownership) in the company through stock market transactions. This liquidity allows shareholders to exit their investments if desired easily.
However, it’s important to understand that owning a minority stake (less than 50% of the shares) means limited control over the company’s direction. For example, if a PLC issues new shares to raise additional capital, existing shareholders’ ownership percentages (stakes) can be diluted, reducing their proportional influence.
Limited liability
A critical benefit of being a PLC shareholder is limited liability. This means that if the company encounters financial difficulties and defaults on its debts, shareholders are not personally liable for those debts. Their personal wealth is protected.
This is a stark contrast to sole proprietorships, where the owner’s assets are on the line if the business encounters financial problems. Limited liability offers significant protection for investors, allowing them to participate in the potential growth of the company with limited downside risk.
Compliance and transparency
PLCs operating on a stock exchange are subject to stricter regulations than private companies. This includes mandatory financial reporting, which requires PLCs to disclose their financial performance, including profits, losses, and overall financial health, regularly.
Additionally, PLCs may need to make other public disclosures about their operations and strategies. This level of transparency fosters trust with investors and provides them with the information they need to assess the company’s potential.
While transparency is valuable for investors, it can also reveal sensitive information to competitors, potentially giving them insights into the PLC’s strategies and vulnerabilities.
Management structure
In a PLC, shareholders elect a board of directors to represent their interests and oversee the company’s day-to-day operations. The board is responsible for making strategic decisions, appointing key executives (CEO, CFO, etc.), and ensuring the company operates ethically and in accordance with regulations.
Ideally, the board acts ethically and prioritizes maximizing shareholder value through sound business decisions and responsible management practices. However, there’s always a potential for conflicts of interest where directors may pursue personal agendas or focus on short-term gains instead of long-term shareholder value.
Effective corporate governance practices are crucial to mitigating these risks and ensuring the board acts in the best interests of the company and its shareholders.
Independence and continuity
PLCs offer greater independence to managers and directors compared to some other business structures. This allows them to leverage their expertise and make strategic decisions without being micromanaged by shareholders.
This autonomy can foster innovation and a more agile decision-making process. A significant advantage of a PLC is its continuity. The company’s existence persists even if the ownership structure changes through shareholder buyouts or director turnover.
This stability contrasts with partnerships or sole proprietorships, which may dissolve upon the owner’s departure. The PLC’s ongoing existence allows the company to build a strong brand reputation, attract and retain top talent, and establish long-term business relationships with suppliers and customers. This continuity fosters trust and confidence in the marketplace, contributing to the PLC’s overall success and longevity.
Double taxation
PLCs are subject to a double taxation system. The company pays corporate income tax on its profits, and shareholders pay personal income tax on any dividends they receive from the company’s profits.
This can be a disadvantage compared to sole proprietorships, where the owner pays only personal income tax on the business’s profits. However, the potential for significant capital gains through share price appreciation and the benefits of limited liability can outweigh the double taxation disadvantage for many investors.
Advantages of a public limited company (PLC)
Public limited companies (PLCs) offer a compelling structure for businesses seeking growth and stability. Let’s delve deeper into the key benefits that PLCs provide:
Limited Liability: a shield for investors
A cornerstone advantage of a PLC is limited liability. Shareholders’ personal assets are shielded from the company’s debts and obligations. This means that even if the business encounters financial difficulties and defaults on its loans, shareholders’ personal wealth, like savings and homes, remains protected.
Unlike sole proprietorships, where the owner’s finances are on the line for company debts, PLCs offer a layer of security for investors. This limited liability feature incentivizes investment by reducing the financial risk for those who participate in a PLC’s ownership.
Separate legal entity: Insulation from lawsuits
The separate legal entity status of a PLC safeguards shareholders from personal lawsuits. Legal actions targeting the company, such as contract disputes or product liability claims, are distinct from lawsuits targeting individual shareholders.
This separation provides an additional layer of protection for investors. Shareholders’ personal assets are not directly exposed to legal challenges against the company itself.
Access to abundant capital: Fueling growth
PLCs have the unique ability to raise vast sums of capital through the public stock market. By selling shares (equity) to a broad range of investors, including individual investors and institutional investors like mutual funds, PLCs can tap into significant financial resources.
This access to capital fuels ambitious growth plans. PLCs can utilize these funds to invest in research and development of new products or services, expand into new markets, or make strategic acquisitions, propelling them towards significant growth and industry leadership. Traditional businesses like sole proprietorships often face limitations in securing large amounts of funding, hindering their ability to scale and compete effectively.
Enduring stability: A company that persists
A significant advantage of a PLC is its enduring stability. The company’s existence is independent of shareholder or director changes. Even if ownership structures change through stock buyouts or there is a turnover in leadership with new directors or CEOs appointed, the company itself continues to operate as a going concern.
This stability fosters long-term planning for the company’s future and reduces uncertainty for both investors and employees. Investors can have more confidence in the company’s longevity, and employees are assured that their jobs are not at risk solely due to changes in ownership or leadership. In contrast, partnerships or sole proprietorships may dissolve upon the owner’s departure, creating uncertainty for stakeholders.
Employee and management ownership: Aligning interests
PLCs can implement employee stock ownership plans (ESOPs) and management stock ownership plans (MSOPs). These programs allow employees and managers to become shareholders in the company by granting them stock options or restricted stock units.
This ownership incentivizes a sense of shared responsibility and aligns employee interests with the company’s success. Employees become more invested in the company’s performance, potentially leading to increased productivity, loyalty, and a more dedicated workforce.
Profitable returns: Beyond dividends
Shareholders in a PLC can benefit from multiple avenues of return on their investment. Regular dividend payouts distribute a portion of the company’s profits to shareholders, providing a steady stream of income for investors.
Additionally, shareholders can potentially earn capital gains by selling their shares at a higher price than the purchase price. The public stock market facilitates these transactions, making it easier for PLC shareholders to exit their investments compared to private limited companies.
If the company’s stock price appreciates, shareholders can profit by selling their shares at a gain. This potential for capital gains adds another layer of incentive for investors to participate in a PLC’s ownership.
Disadvantages of a public limited company (PLC)
While public limited companies (PLCs) offer significant advantages, it’s crucial to weigh the potential drawbacks before making a decision. Here’s a breakdown of the key challenges associated with PLCs:
Uncertain dividends: Balancing growth and rewards
Dividends are not guaranteed for PLC shareholders. Companies may prioritize reinvesting profits (retained earnings) to fuel future growth initiatives. This can include investments in research and development, expansion into new markets, or strategic acquisitions.
While this strategy benefits the company’s long-term prospects and sustainability, it can delay or limit dividend payouts to shareholders. This can impact shareholders’ short-term income expectations, particularly for those who rely on dividends as a source of income.
Agency conflicts: Aligning goals for shared success
A potential challenge in PLCs is the risk of agency conflicts. These arise when the interests of directors diverge from the interests of shareholders. For instance, shareholders might favor maximizing profits through regular dividend payouts.
However, directors might prioritize executive compensation packages or pursue risky ventures that could jeopardize the company’s financial stability. Effective corporate governance practices are essential to mitigate agency conflicts. These practices ensure that directors act in the best interests of shareholders and that the company operates ethically and transparently.
High administrative costs: The price of complexity
Compared to simpler business structures like sole proprietorships or partnerships, establishing and maintaining a PLC is more expensive. PLCs face stricter regulatory requirements, leading to higher compliance costs. This includes legal fees associated with maintaining compliance, auditing costs for annual financial statements, and expenses related to detailed financial reporting mandated by stock market regulators.
A PLC’s larger size and complex operations also necessitate a more robust administrative structure, further increasing operational expenses. These costs can eat into the company’s profitability.
Vulnerability to market fluctuations: A double-edged sword
A PLC’s stock price is susceptible to market speculation, which can be volatile and unpredictable. Speculative trading activity, driven by market sentiment rather than a company’s actual performance, can cause sudden and significant stock price fluctuations.
Sharp declines in stock price can make it difficult for PLCs to raise capital through rights offerings (issuing new shares) during market downturns. This can hinder the company’s ability to fund growth initiatives or strategic acquisitions.
Decision-making delays: Balancing speed with thoroughness
The large size and complex structure of a PLC can sometimes lead to slower decision-making processes. Multiple layers of management may need to be consulted before decisions are made, and board approval can add another layer of bureaucracy.
This can be time-consuming and potentially hinder agility and responsiveness to market changes. In today’s fast-paced business environment, where swift adaptation is crucial for success, slow decision-making can be a disadvantage.
Transparency: A two-way street
PLCs are subject to stringent disclosure requirements. Financial statements, operational data, and other critical information are publicly available through annual reports and other filings.
While this transparency fosters investor confidence by providing them with the information they need to make informed investment decisions, it also presents a double-edged sword.
This level of transparency can also provide competitors with a clear view of a PLC’s strategies, vulnerabilities, and future plans. Competitors can leverage this information to gain an advantage in the marketplace, potentially hindering the PLC’s competitive edge.
Separation of ownership and control: Dilution of influence
In a PLC, shareholders often have limited control over day-to-day operations. Directors manage the company, and shareholders typically elect them and voice their concerns through voting on major decisions like mergers or acquisitions. This separation of ownership and control can be a disadvantage for those who prefer a more hands-on approach to managing a business.
Additionally, if a PLC issues new shares to raise capital, existing shareholders’ ownership percentages (stakes) can be diluted, reducing their proportional influence over the company’s direction. This can be a concern for shareholders who want to maintain a significant level of control over the company’s future.
Examples of the biggest public limited companies in the US
Public limited companies (PLCs) dominate the landscape of major corporations around the world. Here in the United States, some of the biggest and most recognizable PLCs include:
- Apple Inc. (AAPL): A technology leader in consumer electronics and software development, famous for its iPhone, iPad, and Mac computer lines.
- Amazon.com Inc. (AMZN): A multinational e-commerce and cloud computing giant, known for its online retail platform and Amazon Web Services (AWS).
- Microsoft Corporation (MSFT): A software industry titan, renowned for its Windows operating system, Office productivity suite, and Azure cloud computing platform.
- Alphabet Inc. (GOOGL): The parent company of Google, a leading internet search engine and provider of various digital advertising and technology services.
- Tesla Inc. (TSLA): A pioneer in electric vehicles and clean energy solutions, known for its innovative electric cars, solar panels, and battery storage systems.
- Meta Platforms Inc. (META): Formerly Facebook Inc., a social media and technology conglomerate that owns Facebook, Instagram, WhatsApp, and other popular online platforms.
- Johnson & Johnson (JNJ): A multinational healthcare company with a diversified portfolio of pharmaceutical, medical devices, and consumer health products.
- Exxon Mobil Corporation (XOM): A major integrated oil and gas company involved in exploration, production, refining, and marketing of petroleum products.
- Bank of America Corporation (BAC): A leading financial services company offering various banking, investment, and wealth management products.
- Walmart Inc. (WMT): The world’s largest retail corporation by revenue, known for its vast network of discount department stores and grocery stores.
These are just a few examples, and the ranking of the biggest PLCs can shift over time. However, they provide a strong illustration of the scale, reach, and influence that public limited companies can achieve.
