A public limited company (PLC) is a type of business structure that can sell its shares to the general public and trade on a stock market. It is different from a private limited company (LTD), which can only sell its shares privately to a limited number of people.
But why would a business choose to become a PLC instead of an LTD? What are the benefits and drawbacks of this decision? In this article, we will explore the advantages of a public limited company and how they can help a business grow, raise capital, and enhance its reputation.
Key Takeaways
| Advantages of a PLC | Description |
|---|---|
| Access to more capital | A PLC can raise funds by selling shares to the public and issuing bonds. This can help finance expansion, innovation, and debt repayment. |
| Limited liability | The shareholders of a PLC are not personally liable for the debts or losses of the business. They only risk losing the value of their shares. |
| Economies of scale | A PLC can achieve lower costs per unit by increasing its production and purchasing power. This can improve its profitability and competitiveness. |
| Prestige and publicity | A PLC can enhance its brand image and awareness by being listed on a stock market and attracting media attention. This can also help attract customers, investors, and partners. |
Access to more capital
One of the main advantages of a public limited company is that it can raise more capital than a private limited company. A PLC can sell its shares to anyone who is interested in investing in the business, while an LTD can only sell its shares to a few selected individuals or entities.
By selling shares to the public, a PLC can access a large pool of potential investors who can provide funds for various purposes, such as:
- Expanding into new markets or locations
- Developing new products or services
- Acquiring other businesses or assets
- Paying off debts or reducing interest payments
- Investing in research and development or innovation
A PLC can also raise capital by issuing bonds, which are loans that the PLC promises to repay with interest over a fixed period of time. Bonds can be sold to institutional investors, such as banks, pension funds, or insurance companies, who are looking for steady and predictable returns.
By having access to more capital, a PLC can take advantage of growth opportunities, improve its financial performance, and increase its market share.
Examples of PLCs that raised capital by selling shares or issuing bonds
Some examples of PLCs that raised capital by selling shares or issuing bonds are:
- Tesla, an American electric vehicle and clean energy company, raised $5 billion in December 2020 by selling additional shares to the public. The company used the proceeds to fund its expansion plans, such as building new factories in Germany and Texas.
- Netflix, an American streaming service and content producer, raised $2 billion in October 2020 by issuing bonds to investors. The company used the funds to finance its content production, acquisition, and licensing.
- Unilever, a British-Dutch consumer goods company, raised £2 billion in May 2020 by selling shares to the public. The company used the money to strengthen its balance sheet and liquidity amid the COVID-19 pandemic.
Benefits and challenges of raising capital by selling shares or issuing bonds
Raising capital by selling shares or issuing bonds has some benefits and challenges for a PLC, such as:
| Benefits | Challenges |
|---|---|
| – It can provide a large amount of funds quickly and easily | – It can dilute the ownership and control of the existing shareholders |
| – It can diversify the sources and types of financing available | – It can increase the risk and cost of defaulting on debt obligations |
| – It can improve the market value and liquidity of the shares | – It can expose the business to market fluctuations and investor expectations |
Limited liability
Another advantage of a public limited company is that it has limited liability. This means that the shareholders of a PLC are not personally responsible for the debts or losses of the business. They only risk losing the amount they invested in the shares, which is usually much less than the total value of the business.
Limited liability protects the personal assets of the shareholders from being seized by creditors or legal claims. It also encourages investors to buy shares in a PLC, as they know that they will not lose more than they invested.
Limited liability also benefits the PLC itself, as it can borrow money more easily and at lower interest rates than an unlimited liability business. This is because lenders are more willing to lend money to a business that has limited liability, as they have more confidence in its ability to repay.
Examples of PLCs that benefited from limited liability
Some examples of PLCs that benefited from limited liability are:
- British Airways, a British airline company, faced a series of losses and debts in the 1980s and 1990s due to rising fuel costs, competition, and recession. However, the company was able to survive and recover by restructuring its operations, cutting costs, and raising capital. The shareholders of the company did not have to bear the burden of the losses or debts, as they had limited liability.
- Lehman Brothers, an American investment bank, collapsed in 2008 after failing to repay its debts of over $600 billion. The bankruptcy triggered a global financial crisis and affected millions of people and businesses. However, the shareholders of the company were not liable for the debts or losses, as they had limited liability. They only lost the value of their shares, which was around $10 billion.
- BP, a British oil and gas company, faced a massive legal and environmental disaster in 2010 after an oil spill in the Gulf of Mexico. The company had to pay over $65 billion in fines, settlements, and cleanup costs. However, the shareholders of the company were not responsible for the damages or costs, as they had limited liability. They only suffered a temporary drop in the share price, which recovered over time.
Benefits and challenges of having limited liability
Having limited liability has some benefits and challenges for a PLC, such as:
| Benefits | Challenges |
|---|---|
| – It protects the personal assets of the shareholders from business risks | – It can encourage irresponsible or unethical behavior by the managers or shareholders |
| – It attracts more investors who are willing to take calculated risks | – It can create a separation between ownership and management |
| – It improves the creditworthiness and borrowing capacity of the business | – It can reduce the accountability and transparency of the business |
Economies of scale
A third advantage of a public limited company is that it can achieve economies of scale. Economies of scale are the cost savings that result from producing or buying larger quantities of goods or services. For example, a PLC can:
- Negotiate lower prices from suppliers by buying in bulk
- Reduce unit costs by spreading fixed costs over more output
- Increase efficiency by using specialized machinery or technology
- Benefit from learning effects by improving skills and knowledge over time
Economies of scale can improve the profitability and competitiveness of a PLC, as it can offer lower prices to customers, increase its profit margins, and gain an edge over rivals.
Examples of PLCs that achieved economies of scale
Some examples of PLCs that achieved economies of scale are:
- Amazon, an American e-commerce and technology company, achieved economies of scale by expanding its product range, customer base, and distribution network. The company was able to lower its costs by buying in bulk from suppliers, using automated warehouses and delivery systems, and leveraging its data and cloud computing capabilities.
- Walmart, an American retail and grocery company, achieved economies of scale by operating thousands of stores across the world. The company was able to reduce its costs by negotiating with suppliers, using efficient inventory and logistics systems, and benefiting from its large scale and bargaining power.
- Toyota, a Japanese automotive and manufacturing company, achieved economies of scale by producing millions of vehicles every year. The company was able to cut its costs by using standardized parts and processes, employing lean production methods, and learning from its experience and innovation.
Benefits and challenges of achieving economies of scale
Achieving economies of scale has some benefits and challenges for a PLC, such as:
| Benefits | Challenges |
|---|---|
| – It lowers the average cost per unit of production or purchase | – It may lead to diseconomies of scale if the business becomes too large or complex |
| – It increases the profitability and market share of the business | – It may reduce the flexibility and responsiveness of the business to changing customer needs or preferences |
| – It enhances the quality and reliability of the products or services | – It may create environmental or social problems due to overproduction or consumption |
Prestige and publicity
A fourth advantage of a public limited company is that it can enhance its prestige and publicity. A PLC can boost its reputation and credibility by being listed on a stock market, such as the London Stock Exchange (LSE) or the New York Stock Exchange (NYSE). Being listed on a stock market means that:
- The PLC has met certain standards and regulations regarding its financial reporting, governance, and disclosure
- The PLC has been valued by