Public and Private Limited Company: What’s the Difference?
Larissa F.~ 5 min Reading time | 14. Oct 2019
When you’re just starting out in business, usually you’re just trying to get your feet off the ground and turn a profit. Most of the time, businesses in this scenario are either sole proprietorships or private limited companies – they’re structurally simpler and easier to manage, which is particularly important in those first few years of business. Over time, some private limited companies decide to go public. Why?
Usually, companies that decide to become a public limited company have reached a point in their maturity when they’re turning a profit but could benefit from the boost in funding to reduce debt and start new projects, as well as the prestige that comes from being publicly traded. There are, however, some downsides to going public; below, we’ll explain the difference between private limited companies and public limited companies, and the pros and cons of going public.
What’s the Difference between a Public Limited Company and a Private Limited Company?
A private limited company is a company that is owned privately, while a public limited company has the right to sell shares of it’s stock to the public. Both are legally distinct entities with their own assets, liabilities, and profits, so the liability of any one member is limited to what they’ve invested. Unlike sole proprietorships, in both cases the assets of the individual shareholders aren’t at stake when the company goes into debt.
The most significant difference between the two lies in who can invest; a public limited company’s shares can be traded on the stock exchange, while a private limited company’s shares are usually held by friends, family, and investors. Both must be registered with Companies House, but publicly traded companies must have a minimum of £50,000 in share capital in order to get a trading certificate. Public limited companies have more legal obligations than private limited companies, including being audited annually regardless of their size, and making financial reports available to the public.
What are the Pros and Cons of Going Public?
If you’ve reached a stage where you’re thinking about registering as a publicly traded company, there are some important benefits and drawbacks to spend some time considering before you make a final decision. Below are some of the biggest pros and cons to going public:
Advantages of a Public Limited Company
Going public can help established companies gain exposure through the announcement of their new presence on the stock market, giving the company extra brand recognition. Being a publicly traded company may also enhance your customers’ trust in your product or service.
Offering shares for sale to the general public opens up a new source of funding. If you have a strong foundation but have some debt or want to launch a new product that needs capital, going public might be a way to generate the funding you need.
Banks will often be more willing to lend money to publicly traded companies, often at lower interest rates. You don’t have as much financial responsibility for the company’s debts as you would in a privately traded company.
Disadvantages of a Public Limited Company
There are more rules and regulations to follow with a publicly traded company, including having two directors and holding an annual general meeting (AGM), among many others. These extra rules make running a public limited company more expensive and time-consuming than a private limited company.
The financial information of publicly traded companies is made public, and may receive media attention for the better or for the worse. You also have an added responsibility to make sure that the financial reports you are presenting to the public are accurate.
Publicly traded companies still have an obligation to their shareholders, since stock value can fluctuate based on public perception of the company. If you have a production delay on some future product that you’ve already advertised for, for example, it can affect your bottom line if it reduces your stock value.
How to Change from a Private Company to a Public Company
If you’ve weighed your options carefully and have decided it’s time to become a publicly traded company, you’ll need to make sure you have two directors and a secretary, usually someone who is a certified accountant or lawyer. You will also need to follow steps set out by Companies House to re-register your company, including filling out a form RR01, and changing the company’s Memorandum of Association and Articles of Association so they conform to the standards of a public limited company. These documents will lay out the basic structure of the company, how it’s run, and what management changes will look like, so it’s advisable to get a lawyer to assist with this step, particularly if you’re diverging from the model provided by Companies House.
Once you’ve mailed your application to Companies House and paid the associated fees, they’ll send you a certificate of incorporation. If you need a trading certificate, you must apply for it separately, confirming that you have at least £50,000 in share capital that is at least 25% paid off before you can start trading.
Maintaining Your Records as a Public Limited Company
When you have a public limited company, your financial records are much more important, since they are an important part of whether or not the public decides to invest in the company. These companies not only have a responsibility to themselves and the government to report accurately but have an added responsibility to the public to make sure their financial statements accurately represent the state of their financial health.
If you’re deciding whether or not to make the switch to a public limited company, it’s best to consult with an accountant who can help you weigh the pros and cons in more detail, and get you set up for the reporting you’ll be required to do. You’ll need a strong accounting team to help you make the transition – but done with foresight and planning, it can be a new milestone for your shareholders and your company!