Public Limited Company Disadvantages: Understanding Drawbacks

A Public Limited Company (PLC) is a type of business structure commonly used in the UK and other parts of the world. It allows a company to offer its shares to the public and raise capital from investors by being listed on a stock exchange. While this structure has several advantages, such as raising large amounts of capital and increasing brand recognition, there are also notable disadvantages. This article explores these drawbacks in detail to give you a clear understanding of the challenges that come with operating as a PLC.

What is a Public Limited Company (PLC)?

Before diving into the disadvantages, it is essential to understand what a Public Limited Company is. A PLC is a legal structure that allows companies to offer their shares to the public. This means that anyone can buy shares of the company, which can help the company raise significant capital. In return, shareholders get a portion of ownership and the potential to benefit from the company’s success in the form of dividends and share price increases.

To become a PLC, a company must meet several requirements, including:

• A minimum share capital (in the UK, this is £50,000).
• Listing on a recognized stock exchange.
• Compliance with stringent financial and reporting regulations.

Disadvantages of a Public Limited Company

While the ability to raise large sums of money and access public markets is a big draw, there are several downsides to operating as a PLC. Here are the key disadvantages:

Increased Regulatory Scrutiny

One of the biggest disadvantages of being a PLC is the extensive regulatory requirements. Public companies must adhere to strict legal and financial reporting obligations, including publishing their annual financial statements for public scrutiny.

This level of transparency can be a double-edged sword:

• Companies must invest in robust accounting, auditing, and legal teams to ensure compliance.
• A mistake or failure to comply with these regulations can lead to severe penalties, fines, and even legal action.

Many private companies may choose to stay private to avoid these intense regulatory pressures.

Vulnerability to Hostile Takeovers

When a company becomes a PLC, its shares are traded on the open market. This means that anyone can buy a stake in the company, making it vulnerable to hostile takeovers. A takeover occurs when an individual or another company buys a controlling interest (typically more than 50%) of the company’s shares without the board’s approval.

This loss of control can be problematic for the company’s founders or management, who may see their business direction altered by shareholders with different priorities.

Loss of Privacy

Public companies must disclose a large amount of information about their operations, including financial performance, business strategies, executive compensation, and potential risks. This can be seen as a loss of privacy for business owners and directors who may prefer to keep sensitive information confidential.

Competitors and market analysts can use this publicly available data to assess the company’s strengths and weaknesses, which could put the PLC at a competitive disadvantage.

Pressure to Perform for Shareholders

When a company goes public, it faces constant pressure to deliver short-term results to satisfy its shareholders. Shareholders often expect consistent growth in profits, dividends, and share prices, and a failure to meet these expectations can lead to a decline in stock value or even shareholder unrest.

This pressure may lead companies to prioritize short-term profits over long-term growth strategies, resulting in decisions that aren’t always in the best interest of the company or its employees.

Costs of Going Public and Running a PLC

The costs associated with becoming and maintaining a PLC are significant. These costs include:

• Initial public offering (IPO) costs: Legal fees, underwriter fees, and other expenses can make the process of going public very expensive.
• Ongoing operational costs: Regulatory filings, compliance costs, shareholder communication, and maintaining a listing on a stock exchange all add up. Public companies often have to hire additional personnel to manage these tasks, increasing operational overhead.

For smaller businesses, these costs can outweigh the benefits of going public, making a PLC structure less attractive.

Risk of Market Volatility

As a PLC, the company’s stock is publicly traded, meaning that the share price is vulnerable to market fluctuations. External factors such as economic downturns, industry disruptions, or negative media attention can significantly affect the stock price, even if the company’s underlying business is performing well.

Market volatility can lead to uncertainty, making it harder for the company to predict and plan for future financial needs. Additionally, significant drops in share price can reduce investor confidence and make it difficult for the company to raise further capital.

Common Questions 

People frequently ask questions on YouTube and other platforms regarding Public Limited Companies, often focusing on the potential downsides. Here are some of the most commonly asked questions:

What are the disadvantages of a public limited company compared to a private limited company? 

The main differences are related to regulatory scrutiny, loss of control, and public disclosure. Private companies face fewer regulations and have more control over their business decisions, while public companies must operate under strict financial and legal reporting rules.

Why do some companies choose to stay private?

 Many companies prefer to stay private to avoid the costs and complexities associated with being a public company. Additionally, private companies do not have to disclose sensitive financial information or face shareholder pressure to deliver short-term results.

Can a public limited company be taken private again? 

Yes, companies can go private through a process called “delisting,” where they buy back shares from the public and remove themselves from the stock exchange. However, this can be a costly and complex process.

What is a hostile takeover, and how can it affect a public company? 

A hostile takeover occurs when an outside entity acquires a significant portion of a company’s shares without approval from its board of directors. This can lead to changes in the company’s management, business direction, and overall strategy, often against the original leadership’s wishes.

Is going public always the best option for companies?

 No, going public has both pros and cons. While it can provide access to large amounts of capital, it also comes with increased scrutiny, operational costs, and loss of control. Many companies weigh these factors carefully before deciding to go public.

Conclusion

While becoming a Public Limited Company has its advantages—such as access to capital, increased brand exposure, and opportunities for growth—it is not without its drawbacks. The significant costs, regulatory demands, and potential for loss of control make the PLC structure unsuitable for every business.

Companies considering going public should weigh these disadvantages carefully and consider whether the benefits of raising capital through public markets outweigh the challenges they will face in operating under the public eye.

For many businesses, staying private may offer a more flexible and cost-effective option. On the other hand, for those looking for growth and expansion, transitioning to a PLC might be the right choice, provided they are prepared for the responsibilities and challenges that come with it.

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