Public Limited Liability Company: Features, Advantages, and Challenges Explained

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Lesson Objectives

By the end of the lesson, students should be able to:

1. Define a public limited liability company (Joint Stock Company) clearly and correctly.
2. Identify and explain the features of a public limited liability company.
3. List and describe the various sources of finance available to a public limited company.
4. State and explain the advantages of operating as a public limited company.
5. Mention and explain the disadvantages or challenges of a public limited company.

What is a Public Limited Liability Company?

A Public Limited Liability Company (PLC), also known as a Joint-Stock Company, is a type of business organisation that is owned by shareholders who purchase shares in the company. It is a legal entity separate from its owners, meaning it can enter into contracts, own property, sue, and be sued in its own name. The shareholders enjoy limited liability, which means they are only responsible for the company’s debts up to the amount they invested in shares. A PLC can raise capital from the general public by selling its shares on the stock exchange, and its affairs are managed by a board of directors elected by the shareholders.

Features of a Public Limited Liability Company

1. Ownership by Shareholders

   A Public Limited Liability Company is owned by people who buy shares in the business. These people are called shareholders. Each share represents a part of the company, and the more shares a person owns, the more ownership they have. Shareholders do not usually manage the day-to-day running of the business, but they have voting rights at the Annual General Meeting (AGM), where major decisions are made.

2. Limited Liability

   One of the biggest benefits of a PLC is that it offers limited liability to its shareholders. This means that if the company runs into debt or goes bankrupt, shareholders are only responsible for the money they invested in buying shares. Their personal property (like their house or car) is protected and cannot be used to pay the company’s debts.

3. Separate Legal Entity

   A public limited company is recognised as a separate legal person from its owners. This means it can enter into contracts, own assets, sue or be sued in its own name. The company continues to exist even if some shareholders leave or die. This legal independence helps to protect both the company and the shareholders.

4. Transferability of Shares

   In a public limited company, shareholders can freely buy or sell their shares on the stock exchange. This makes it easy for investors to join or leave the company. This feature encourages more people to invest in the company because they know they can sell their shares whenever they want.

5. Board of Directors

   The business is managed by a group of people called the board of directors. These directors are elected by the shareholders to make decisions and oversee the running of the company. Directors are usually experienced professionals who are expected to act in the best interest of the shareholders and the company.

6. Large Capital Base

   Because a public limited company can sell shares to the general public, it can raise a lot of money to run its operations, invest in new projects, or expand. This large capital base allows the company to compete on a larger scale, conduct research, and achieve growth faster than smaller businesses.

7. Must Publish Accounts

   By law, a public limited company must make its financial reports and activities public. This includes income statements, balance sheets, and other reports. This is done to keep shareholders and the general public informed and to ensure transparency and accountability in how the company is run.

8. Continuity

   A public limited company continues to exist even if a shareholder dies, sells their shares, or leaves the company. This feature ensures stability and long-term planning, as the company does not depend on the life or presence of any one person. It exists until it is officially shut down or liquidated.

Sources of Finance for a Public Limited Liability Company

Public limited companies need a lot of money to operate. They get funds from:

1. Sale of Shares

   The main source of finance for a public limited company is the sale of shares. Shares are units of ownership that are sold to members of the public through the stock exchange. When people buy these shares, they become part-owners of the company, called shareholders. The money received from the sale of shares is used to fund the business’s operations, expansion, and other projects. Since PLCs can sell shares to a large number of people, they are able to raise huge amounts of money.

2. Debentures

   Debentures are a type of long-term loan that a company borrows from the public. Investors who buy debentures are lending money to the company, and in return, the company promises to pay them back with interest after a specific period. Debenture holders do not become part-owners of the company like shareholders, but they are entitled to receive interest whether or not the company makes a profit. This is another way for public companies to get funds without giving away ownership.

3. Bank Loans and Overdrafts

   Public limited companies also borrow money from banks. A bank loan is a sum of money borrowed for a specific period, to be repaid with interest. An overdraft allows a company to withdraw more money from its account than it has, up to a certain limit. These types of finance are useful for meeting short-term and emergency financial needs. Although interest must be paid, banks usually trust big companies because of their size and reputation.

4. Retained Profits

   Retained profits are the money a company keeps from its previous years’ earnings instead of sharing all the profit with shareholders as dividends. This money is saved and reinvested back into the business. Retained profits are a cheap and convenient way of financing because the company does not have to pay interest or give up control. However, this method depends on the company making enough profit in the first place.

5. Trade Credit

   Trade credit is when a company buys goods or services from suppliers but does not pay immediately. Instead, payment is delayed for a few weeks or months. This gives the company time to sell the goods and generate income before paying the supplier. It is a short-term source of finance and helps the business to manage its cash flow. However, it requires good relationships with suppliers and a good credit record.

6. Government Grants or Loans

   Sometimes, the government provides financial support to public limited companies in the form of grants or loans. Grants are free money given to encourage investment in certain sectors or regions, especially for creating jobs or developing infrastructure. Loans from the government must be paid back, often at lower interest rates than commercial banks. This source of finance helps companies reduce costs and expand operations, especially in industries important to national development.

Advantages of a Public Limited Liability Company

1. Large Capital

    One major advantage of a Public Limited Liability Company is its ability to raise large amounts of capital. Since it can sell shares to the general public through the stock exchange, it is easier to gather funds from a wide range of investors. This makes it possible for the company to fund big projects, expand operations, invest in modern equipment, and compete globally. No other type of business organisation can raise capital as easily and in such large amounts as a public company.

2. Limited Liability

    Shareholders in a public limited company enjoy the benefit of limited liability. This means that if the company runs into debt or fails, the personal assets of the shareholders are protected. They only lose the money they used to buy shares. This encourages more people to invest in the company because they know they will not be held responsible for debts beyond their investment. It reduces the financial risk for investors and increases public confidence in owning shares.

3. Continuity

    A public limited company has what is known as perpetual existence. This means that the company continues to exist even if a shareholder dies, withdraws, or sells their shares. The business does not stop because of changes in ownership. This continuity gives the company stability and allows for long-term planning and investment. It also assures employees, customers, and investors that the company is reliable and not likely to shut down suddenly.

4. Economies of Scale

   Because of its large size and wide operations, a public limited company can benefit from economies of scale. This means that as it produces more goods or offers more services, the cost per unit goes down. For example, buying raw materials in bulk often comes at a cheaper price. Also, they can afford to use modern technology to improve efficiency. This allows the company to reduce its production costs and increase profits, making it more competitive in the market.

5. Public Confidence

   Being listed on the stock exchange means a public limited company must follow strict rules, publish its financial statements, and be transparent. This builds trust and confidence among the public, investors, and business partners. People feel safer doing business with or investing in the company because it is monitored by regulatory bodies. A strong public image also helps the company to attract more investors and customers, which helps the business grow.

6. Transferability of Shares

   One key advantage of a public limited company is that its shares can be freely bought and sold on the stock exchange. This makes it easy for shareholders to sell their shares when they want to, and new investors can easily buy in. This flexibility encourages investment because shareholders are not locked into the company forever. It also means the company can continually attract new investors, which keeps money flowing into the business.

Disadvantages of a Public Limited Liability Company

1. Complex Formation

   Forming a public limited liability company is a complicated and expensive process. It involves many legal steps, such as registering with the Corporate Affairs Commission, preparing legal documents like the Memorandum and Articles of Association, and meeting government requirements. This process can take a lot of time and money, which discourages small business owners or individuals who cannot afford the cost or handle the paperwork.

2. Lack of Privacy

   Unlike private businesses that keep their operations secret, public limited companies are required by law to make their financial accounts and business activities open to the public. This includes publishing annual reports, profit statements, and other records. As a result, competitors, the media, and the general public can easily access this information, which can sometimes be used against the company.

3. Separation of Ownership and Control

   In a PLC, the owners (shareholders) are usually different from the people managing the company (board of directors and managers). This separation can lead to a lack of personal interest or commitment from the managers. Sometimes, the managers may make decisions that benefit themselves rather than the shareholders, leading to inefficiency and conflict between both parties.

4. Possibility of Takeover

   Because shares of a PLC can be bought and sold freely on the stock exchange, another company or person can buy a large number of shares and take control of the company. This is called a hostile takeover. It can happen without the agreement of the existing owners or directors and may lead to job losses, change of company goals, or restructuring that affects workers and stakeholders.

5. Too Much Regulation

   Public limited liability companies are heavily controlled by government laws and regulations. They must obey strict rules concerning reporting, accounting, taxation, and corporate governance. These rules are meant to protect the public, but they also limit how freely the company can operate. The company must spend money and time to ensure it is always following the law, which can be a burden.

Lesson Summary

• A Public Limited Liability Company (PLC) is a business owned by shareholders, has a separate legal identity, and can raise funds by selling shares to the public.
• Key features include limited liability, separate legal existence, share transferability, large capital base, and management by a board of directors.
• PLCs get money from share sales, debentures, bank loans, retained profits, trade credit, and government grants.
• Benefits include access to large capital, limited liability, business continuity, economies of scale, and share transferability.
• Challenges include complex setup, lack of privacy, risk of takeover, strict regulations, and possible disconnect between ownership and management.

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