This is exactly what we are concerned about in this blog. We realize that there are always two sides to a coin, and an informed decision can only be made if you are aware of both. We have thoroughly examined and discussed all the disadvantages of a Public Limited Company and laid them down in order, for a simple yet comprehensive understanding.
A Public Limited Company is one of the many preferred forms of business structures in India. A public limited company is a company incorporated under the Companies Act, 2013. That offers limited liability to its owners and shareholders. Its shares can be traded on public platforms like stock exchange, and are open for sale to the general public as well.
A Public Limited Company is regulated by the Ministry of Corporate Affairs and the Securities and Exchange Board of India (SEBI). It is subject to stringent laws by these regulatory agencies, and is required to regularly update its shareholders of its genuine financial situation.
As a legally incorporated entity, a public limited company has a distinct legal identity, and is entitled to the right to hold properties and assets in its name.
A public limited company has a few drawbacks when compared to other types of similar business entities. We have not only listed but have also discussed in detail, all such disadvantages below.
The legal and regulatory compliances for a public limited company are not only stricter than those for private limited companies, but in order to safeguard shareholders from unnecessary risks, additional constraints have been imposed. These restrictions and constraints lead to reduced operational flexibility for Public Limited Companies. A few such compliances / restrictions have been mentioned below.
Public Limited Companies must adhere to a considerably greater standard of transparency towards its shareholders and the general public, when compared to a Private Limited Company. For instance, Public Limited Companies must have their accounts audited more frequently than a Private Limited Company.
Moreover, A public limited company is required to provide all information in a detailed manner about its operational performance, financial performance, and the status of its accounts to all its shareholders. This information is then to be made publicly accessible for anybody to view it on public platforms. Business analysts frequently examine and remark on the financial status of public limited company financial statements quite intensely, as the performance of such companies not only affect the markets at micro as well as macro levels.
Compared to a Public Limited Company, a Private Limited Company has a more efficient management. This is because the shareholders responsible for making key decisions in such companies, are usually already acquainted with the directors or founders of the company. Strangers are generally not preferred as investors in a Private Limited Company.
On the contrary, the shares of public limited companies are held by any investor, among the general public, who may not be acquainted with the Company to any extent.
A private limited company has been often observed to be picky about the admission of shareholders, and does not prefer to admit investors who do not support the company’s goals and intentions of the company. When fresh shares are issued by a Private Limited Company, or such circumstances arise when shares are needed to be transferred, pre-emption rights may be used to allow current shareholders to keep control of the firm even after the transfer of ownership to a new shareholder.
It is significantly more difficult to regulate the wide range of shareholders in a public limited company. Therefore, it is possible for the original founders or directors to lose control over its operations and management gradually, during the normal course of business of the company. Due to such loose control, the entire management structure can end up in dilemmas, confusions, and dead ends, more often than you would think.
Institutional shareholders, as compared to the shareholders among the general public, have a disproportionate amount of power when it comes to managing the affairs of the company, as they can frequently refer to experts for consultation inside the company, and adopt specific company policies for better management.
As we have already mentioned earlier, a public limited company must make a larger minimum financial investment than a private limited company. As a matter of fact, a public limited company can only be set up if it has a paid up capital of at least Rs.5 lakhs. There is no such prescribed limit for minimum paid up capital to set up a Private Limited Company.
Moreover, a Public limited company has to spend a huge amount of its funds and earnings in fulfilling the wide range of compliances imposed upon it. This has the potential to increase the overall cost of operations of the company to a great extent.
A private limited company’s success in the market is closely correlated with its internal resources of the company, its investments, and business performance. This is however, not the case with a Public Limited Company.
Success of a Public Limited Company is dictated by its stock value. We’ve all heard stories of businesses failing as a result of external problems like poor PR, which caused their share values to plunge. There is no doubt that PLCs are more susceptible to influence on value than LTDs, which is detrimental to the stability of a public firm.
To conclude, Public limited companies are subject to more inspection and regulation, which might increase their overall cost of operation. Such a heavy cost burden is unlikely to yield the results you seek, while you are managing a public limited company, or while you are conducting its business operations. In this context, other drawbacks of a Public Limited Company can result in unprecedented risks and hurdles.