Disadvantages of a Public Limited Company

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A Public Limited Company (PLC) means, first, that the firm is parceled out into shares and sold "publicly" on any or all the globe's stock exchanges. Secondly, it means that those who invest in the firm are protected from extreme loss if the company fails. This is called "limited liability." This means that if one invests in a firm that fails, only that investment money can be claimed by the firm's creditors. More abstractly, "limited" means that only the existing assets of the firm can be seized for the payment of debt.

High Costs

  • A PLC is normally a complex thing to start. The firm must hire an investment bank and a securities lawyer. The banker (or "underwriter") then offers the initial shares to the public (and keeps a substantial commission). Often, the costs of setting up a public firm and Initial Public Offering (IPO) can run into hundreds of thousands of dollars.

Public Books

  • The term "public" here is to be taken literally. Once a firm goes public, the firm is open to public inspection. The financial books and records of the firm are open to anyone, allowing the competition to see precisely how much profit or loss the firm is experiencing.

Greedy Shareholders

  • Those who buy shares have no particular interest in the firm except in that it makes a quick buck. Most companies however, have an interest in laying out a long-term growth plan that takes patience and planning. It is not often many shareholders see it this way.

Takeovers

  • Since the company is now "public," anyone can buy up shares, and there is no limit as to how many shares one can buy. Under certain circumstances, hostile investors might buy up a large amount of stock, giving them a strong voice on the board of directors. In this case, a firm that was built up by one group (or person) can now be taken over by others since the firm has gone public.

Power

  • Going "public" means a certain lack of control by the founders of the firm. In some cases, the firm can be controlled by a board of directors who do not necessarily have the time for hands-on business management. Therefore, ownership can be separated from control. If this is the case, then those who control the business do not own it, and do not see profit. This is not an incentive (necessarily) to rational management.

Decisions

  • If the company is public, it must have a board of directors representing the main and most powerful stockholders. This means, in turn, that major decisions must go through the board, with debates and voting. In reality, this entails that decisions will be slow and often painful. Sometimes, they might not be made at all.

References

  • Photo Credit new york stock exchange image by Gary from Fotolia.com
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