Setting up a public limited company – Advantages and disadvantages19 Nov 2022
When you’re in the early stages of growing your business, you have to make important decisions about the future direction and structure of your business. Should you remain as a sole trader or partnership, or consider a different business structure? Should you set up a public limited company?
In an earlier article we compared the benefits of setting up a limited company with those of remaining a sole trader. Here, we consider the advantages and disadvantages of setting up a public limited company (PLC).
If you are currently a sole trader, then you are the business and you own it. If you become a public limited company, you may be the original owner/founder, but ownership is now much wider because anyone can buy shares in the business. There are also many additional legal and accounting requirements that you must meet.
However, from an operating perspective, it’s business as usual. So, it’s important to carefully consider the advantages and disadvantages before making any firm decisions.
Requirements for setting up a Public Limited Company (PLC)
If the term ‘public limited company’ or ‘PLC’ as it’s better known conjures up visions of a giant corporation on the scale of a BP or Siemens, that’s not the case.
The requirements for becoming a public limited company are much simpler. You must have:
Minimum of two directors and shareholders
Minimum of £50,000 share capital
A qualified company secretary
Advantages of a Public Limited Company
Opportunities to raise capital
If you want to grow your business, you need capital to invest in expansion. Using your profits to fund growth is possible, but can be limiting.
As a PLC, you can offer shares for sale and use the additional capital to accelerate growth. Although you may attract smaller shareholders initially, as your business grows, you may attract larger institutional investors.
With the additional capital, you can fund research and development, launch new products, enter new markets or build a bigger team. Access to capital can make a real difference to your growth prospects.
A stronger brand
Putting PLC behind your company name can increase the value of your brand and open new opportunities for your business. Regardless of the actual size of your business, calling yourself a public limited company creates the perception of a large successful business.
That builds confidence in prospective customers, suppliers and business partners, making it easy to enter new markets, increase sales and negotiate better terms with suppliers. It can also make it easier to obtain other forms of finance, as lenders may be more willing to deal with a public company.
Wider ownership and reduced risk
As a sole trader, you are responsible for any debts or dealing with any legal issues facing your business. But, as a PLC, ownership of the company now moves to the shareholders and they have limited liability for any acts that adversely affect the business.
This can help you attract shareholders, who recognise that they have minimal risk of liability. It can also reduce the risk to your business of being dependent on a small group of investors.
Support from shareholders
Shareholders want your business to succeed because that increases the value of their shares and the potential return on their investment if they decide to sell. Depending on the type of shareholders you attract, you may be able to draw on advice and guidance from individuals or groups with specialist knowledge of your industry.
Simpler exit strategy
Looking a long way ahead, you may wish to exit the business at some stage in the future. That’s not an easy task when you are the owner and solely responsible for the business.
As a plc, you can transfer your shares – and ownership of the business – more easily. If your business is successful and has a high profile in the market, you will find it easier to attract potential buyers and exit the business at a profit.
Disadvantages of a Public Limited Company
Loss of control
The owners of the business are now the shareholders and you are accountable to them. They will be monitoring your performance in running the business, but they may also have views on the direction of the business that are different to your original plans.
You will have to spend time reporting to shareholders, managing their expectations and dealing with any challenges to your management of the business. The situation can become particularly difficult if shareholders own more than 50 percent of the business, which gives them a strong advantage in the event of any disputes.
Higher set-up costs
One of the requirements for setting up a PLC is that you must have a minimum of £50,000 share capital. You must also ensure that at least 25 percent of that is paid up, which means you will have to invest at least £12,500 of your own funds before starting.
You will also incur fees from professional advisers, particularly if you want your company listed on the Stock Exchange.
Increased legal responsibilities
Setting up a public limited company increases the legal requirements on your business. You must meet the minimum requirements for becoming a PLC and obtain a trading certificate from Companies House before you can start trading.
You must follow all the rules on offering and trading shares, in addition to the reporting requirements of a public company. For example, you must hold an Annual General Meeting and obtain the agreement of the majority of shareholders to any resolutions that affect the business.
More complex accounting requirements
As a PLC, you must prepare and file a full set of accounts, have the accounts audited and pay Corporation Tax at the correct time.
Because you must file a full set of accounts, you will be providing more data on your business performance and that can be used by investment analysts and competitors to make judgements about your business.
Vulnerability to the market
The value of your shares will be dependent on your business performance and that may force you into taking short-term measures to maintain the share price. You may also be vulnerable to shareholder action if there are disputes or if business results are disappointing.
In a worst-case scenario, you could be vulnerable to a takeover, either from a group of shareholders or a hostile company, which could mean a total loss of control.
We offer company formation services and professional advice
There are clear potential benefits in setting up a public limited company when you are planning for growth, but there are also strong disadvantages.
Making a decision about the right structure for your business can be complex and must be based on sound business and financial principles.
We can provide expert advice and guidance to help you make your decision - and we also offer a comprehensive Company Formation Package so you can leave everything to us.
To find out more, please contact us on 0207 043 4000 or email@example.com.
You can also get an instant accounting quote here.