Updated : September 25, 2024Disadvantages of Public Limited Companies
Overview : Public Limited Companies are large-scale businesses trading their stocks freely in the market. These days, they have become one of the most powerful business ventures in India. You might be familiar with the advantages of Public Limited Companies, but is that enough to make an informed decision about opting for this structure? Certainly Not! So, here is a detailed guide on the other side of the story, that is the disadvantages of Public Limited Companies.
While opting for a business structure to incorporate your startup, a company is the best choice! This is owing to several benefits it offers, like limited liability for owners, distinct legal identity of the business, and continued existence despite ownership change. However, even among companies, you are required to make an informed choice as to which one to opt for. The most popular options remain Private Limited and Public Limited Companies. In this blog, we will understand the several disadvantages of a Public Limited Companies, so that you have a clear picture of this structure before you opt for the company registration process
What is a Public Limited Company?
A Public Limited Company is one of the many preferred forms of business structures in India. A public limited company is a company incorporated under the Companies Act, 2013. That offers limited liability to its owners and shareholders. Its shares can be traded on public platforms like the stock exchange, and are open for sale to the general public as well.
A Public Limited Company is regulated by the Ministry of Corporate Affairs and the Securities and Exchange Board of India (SEBI). It is subject to stringent laws by these regulatory agencies and is required to regularly update its shareholders on its genuine financial situation. As a legally incorporated entity, a public limited company has a distinct legal identity and is entitled to the right to hold properties and assets in its name.
Disadvantages of Public Limited Companies
While public limited companies offer several advantages, it’s essential to acknowledge their disadvantages as well. This includes excessive regulations, greater compliance requirements, higher operational costs, greater funding requirements, and so on. Further, we have explained each of these disadvantages in detail. Through these explanations, our goal is to help you understand the whole picture of this business structure.
Less Operational Flexibility
The legal and regulatory compliances for a public limited company are not only stricter than those for private limited companies, but in order to safeguard shareholders from unnecessary risks, additional constraints have been imposed. These restrictions and constraints lead to reduced operational flexibility for Public Limited Companies. A few such compliances / restrictions have been mentioned below.
- At least 7 shareholders are required to set up a Public Limited Company, whereas, a Private Limited Company can be set up with 2 shareholders only.
- Before getting incorporated, a Public Limited Company must have at least 3 directors to control its management. Compared to that, a Private Limited Company can be incorporated with only 2 directors in the company.
- Compared to Private Limited Companies, stricter regulations are imposed on loans taken by directors in a Public Limited Company.
- It is mandatory to appoint a Company Secretary in a Public Limited Company, whereas, in a Private Limited Company, such an appointment is optional or on the discretion of its shareholders.
- Accounts must be produced for audit within six months of the end of a financial year has led to an enhanced transparency. The time limit is nine months for Private Limited Companies.
- Every single decision in a Public Limited Company with an effective resolution passed by a majority of votes, either in the general meeting of Shareholders or the meeting of the Board of Directors. For this purpose, a general meeting of shareholders is required to be held every year, and the meeting of the Board is required to be held 4 times a year, in a Public Limited Company.
- A minimum paid up capital of Rs.5 lakhs is required to set up a Public Limited Company, whereas, there is no such prescribed minimum limit for paid-up capital to set up a Private Limited Company.
Greater Transparency is Necessary
Public Limited Companies must adhere to a considerably greater standard of transparency towards its shareholders and the general public when compared to a Private Limited Company. For instance, Public Limited Companies must have their accounts audited more frequently than a Private Limited Company. Moreover, A public limited company is required to provide all information in a detailed manner about its operational performance, financial performance, and the status of its accounts to all its shareholders.
This information is then to be made publicly accessible for anybody to view it on public platforms. Business analysts frequently examine and remark on the financial status of public limited company financial statements quite intensely, as the performance of such companies not only affects the markets at micro as well as macro levels.
Ownership and Management Dilemmas
Compared to a Public Limited Company, a Private Limited Company has a more efficient management. This is because the shareholders responsible for making key decisions in such companies, are usually already acquainted with the directors or founders of the company. Strangers are generally not preferred as investors in a Private Limited Company. On the contrary, the shares of public limited companies are held by any investor, among the general public, who may not be acquainted with the Company to any extent.
A private limited company has been often observed to be picky about the admission of shareholders, and does not prefer to admit investors who do not support the company’s goals and intentions of the company. When fresh shares are issued by a Private Limited Company, or such circumstances arise when shares are needed to be transferred, pre-emption rights may be used to allow current shareholders to keep control of the firm even after the transfer of ownership to a new shareholder.
It is significantly more difficult to regulate the wide range of shareholders in a public limited company. Therefore, it is possible for the original founders or directors to lose control over its operations and management gradually, during the normal course of business of the company. Due to such loose control, the entire management structure can end up in dilemmas, confusions, and dead ends, more often than you would think.
Institutional shareholders, as compared to the shareholders among the general public, have a disproportionate amount of power when it comes to managing the affairs of the company, as they can frequently refer to experts for consultation inside the company, and adopt specific company policies for better management.
Higher Initial Financial Commitment
As we have already mentioned earlier, a public limited company must make a larger minimum financial investment than a private limited company. As a matter of fact, a public limited company can only be set up if it has a paid up capital of at least Rs.5 lakhs. There is no such prescribed limit for minimum paid up capital to set up a Private Limited Company. Moreover, a Public limited company has to spend a huge amount of its funds and earnings in fulfilling the wide range of compliances imposed upon it. This has the potential to increase the overall cost of operations of the company to a great extent.
Stock Market Vulnerability
A private limited company’s success in the market is closely correlated with its internal resources of the company, its investments, and business performance. This is, however, not the case with a Public Limited Company. The success of a Public Limited Company is dictated by its stock value. We’ve all heard stories of businesses failing as a result of external problems like poor PR, which caused their share values to plunge. There is no doubt that PLCs are more susceptible to influence on value than LTDs, which is detrimental to the stability of a public firm.
Conclusion
To conclude, Public limited companies are subject to more inspection and regulation, which might increase their overall cost of operation. Such a heavy cost burden is unlikely to yield the results you seek, while you are managing a public limited company, or while you are conducting its business operations. In this context, other drawbacks of a Public Limited Company can result in unprecedented risks and hurdles.
