If you run a successful private limited company and are looking to transition to public status, it’s important to understand the implications of your decision and the obligations involved.
In thie guide, we explain the benefits and risks of becoming a public limited company, together with the additional administrative and regulatory requirements that must be met.
What is a public company limited by shares?
A company limited by shares can take one of two forms: a private limited company or a public limited company (PLC). The key difference between the two comes down to how the company shares can be sold and traded. As the name suggests, and provided the company is listed on an exchange, a PLC is able to trade publicly. In contrast, a private company isn’t able to offer its share to the general public, but can only sell its shares to existing shareholders or investors.
The majority of start-ups are incorporated as private limited companies, typically owned by a small number of founders, together with investors or funders, only later converting to a public limited company once they have an established track record to attract public investors. However, a PLC shares many of the same characteristics as a private limited company.
Both public and private limited companies are managed by their directors in accordance the company’s memorandum and articles of association, and in compliance with the provisions of the Companies Act 2006 — although a public limited company needs a minimum of two company directors, whereas a private limited company can have just one. A PLC must also have a company secretary, which isn’t the case with a private limited company. This must be someone with a professional qualification, such as an accountant or lawyer, or someone the directors of the public limited company believe is suitably qualified to fulfil this role.
Each are also limited liability companies, owned by their members who hold shares in the company in question. Any company limited by shares is a distinct legal entity, separate from its members. This means that shareholders are not responsible for any company losses, unless they’ve given personal guarantees on any business loans. The shareholders’ liability is limited to the original capital they’ve invested in the business by virtue of the shares they own. Unlike a private limited company, however, a PLC must have issued share capital of at least £50,000, with 25% of that amount paid up on each share prior to registration, plus any premium.
How is a public company limited by shares formed?
A private limited company can be re-registered as a public company limited by shares following a special resolution of the shareholders. Once this has been passed, to re-register a private limited company as a PLC, you’ll need to file Form RR01, containing:
- a company name ending in PLC or Public Limited Company, checked against the Index of Company Names at Companies House to ensure you’re not taking another company’s name
- a registered office address for the proposed PLC
- the details of at least two directors of the PLC
- the details of your company secretary
- confirmation of a minimum of £50,000 share capital
- the details of shareholder(s) and number of shares issued
- certain security information for both directors and shareholder(s).
You’ll also be required to complete an application confirming that the company meets the PLC share capital requirements for a public limited company using Form SH50. Provided the requirements have been met, Companies House will then issue a trading certificate.
However, by far the most challenging aspect of going public is the preparatory process to be able to make what’s known as an initial public offering (IPO). An IPO is the method used to make shares available on a recognised stock exchange, such as the London Stock Exchange (LSE) or the Alternative Investment Market (AIM). The term ‘going public’ typically refers to a private company’s IPO, following which it becomes a publicly traded and owned entity.
As the first public sale of shares by a privately owned company, an IPO involves a number of complex stages, from valuations and marketing to preparing various reports necessary to float the company. This can take a number of months, or even years, to complete. This means the various benefits and drawbacks of transitioning from a private limited company to a PLC should be carefully considered before embarking on the IPO process.
Benefits of a public company limited by shares
As SMEs expand and become more established, the decision to transition from a private to a public company limited by shares is often made for a number of different reasons. This is because there are various benefits of becoming a PLC, including:
- Raising capital: the ability to sell shares to the public provides a PLC with a potentially substantial source of capital that can then be re-invested. The funds could be used, for example, to finance corporate operations, launch new products, enter new markets, establish new lines of business, fund mergers and acquisitions, restructure finances, reduce corporate debt, or to help finance research and development.
- Generating wider brand awareness: listing a company on a stock exchange generates attention from investors, increasing awareness of your brand. This often also has the knock-on effect of making your brand appear more prestigious to customers, suppliers and even prospective employees, where PLCs typically see an increase in sales and staff retention.
- Reducing risk: while other forms of investment can require a company to give up large amounts of equity to individual investors, a broader base of shareholders created through selling shares publicly reduces the risks associated with financing.
- Increasing access to other forms of finance: from a credit perspective, the more stringent regulatory requirements make lending to PLCs a much safer bet than private limited companies. A public limited company will therefore usually find it easier to get bank loans or other forms of finance, with more favourable interest rates and repayment terms.
- Creating greater liquidity for investors: the ability to transfer shares without restriction means that investors can sell their shares relatively quickly. This, of itself, together with the prestige attached to going public, can also increase the value of shares held.
Risks of a public company limited by shares
While all of the benefits may make the transition to PLC status seem like an extremely attractive proposition, it’s not without its disadvantages. When compared with private limited companies, public companies limited by shares have the following drawbacks:
- Potential loss of control: once shares in a public limited company have been floated on a stock exchange, anyone is able to acquire these, potentially resulting in a loss of control over the company. A PLC is especially vulnerable to hostile takeover situations where another business has been able to buy a majority shareholding in the company.
- Greater need for transparency and disclosure: because members of the public invest in PLCs, full details of the company’s financial situation and recent performance must be published on a regular basis. This is so that potential buyers can understand the risks of investing. A PLC must therefore be prepared to be under constant public scrutiny. Once in the public domain, this information is then accessible to all, where any downturn in performance could potentially result in negative press and a loss of confidence.
- Stock market vulnerability: although being on the stock market allows a company to raise share capital, it also leaves it exposed to the effects of any significant changes in share value. Negative media attention can reduce the value of a company’s shares, and the perceived success of a PLC very much ties into its share price.
- Significant cost and time: the IPO process can take months or even years to complete, involving a number of different specialist professionals, as well as internal man hours, to prepare the company to go public. Managing for short-term quarterly results because of this, instead of long-term goals, can also be frustrating, although absolutely necessary given that missing financial estimates can cause steep drops in stock prices.
- There are a number of requirements to set up a private company limited by shares, including at least one director and one shareholder, although these can be the same individual. The company must also be registered with Companies House.in addition to requiring two directors and a qualified company secretary, PLCs are more highly regulated than private limited companies, with a number of additional ongoing administrative and regulatory obligations.
- Higher penalties: HMRC takes a tougher approach with public limited companies than private companies when dealing with any failure to fulfil their statutory filing obligations. For example, fines for late filing of accounts are several times higher for PLCs.
Public company limited by shares obligations
Once a company has been listed on an exchange, it will be subject to a number of ongoing obligations depending on the market on which its shares are listed. It must adhere to the listing requirements of the particular exchange in question, such as the LSE or AIM.
Public limited companies are also far more highly regulated than private limited companies. This means that various statutory requirements must be met, including regulatory filings, account auditing, financial reporting and annual general meetings. After its first year, company accounts are also required to be submitted to HMRC within 6 months of the end of the financial year, rather than the 9-month period allowed for private limited companies.
In essence, with an increased number of investors in a PLC comes an increased number of shareholders in whose best interests its directors must act and be openly accountable to.
Can a company become a public company limited by shares without being listed?
It’s possible for a private limited company to become a public limited company without being listed on any exchange. It’s a common misconception that to be a PLC you have to float your company, with all the time and expense that this entails. Provided the company complies with the additional statutory requirements, a private company can re-register as a public company yet remain privately owned — keeping the same restrictions on issues and transfers of shares that it had as a private company, and continuing to operate almost exactly as it did before.
In the UK, not all public limited companies are listed on a stock exchange, even though they’re theoretically entitled to do so. This is because trading on a regulated market means a lot of additional regulatory and corporate governance compliance for a company.
By simply re-registering as a public limited company, without more, the suffix alone can confer an impression of size and maturity, improving the company’s standing with both customers and suppliers. It also provides an ideal opportunity for a promotional rebrand of the company name and image. However, becoming a PLC without being listed is far less common than ‘going public’. This is because the cost of re-registration, and the additional administrative workload for public companies, can often outweigh the potential benefits of obtaining a ‘PLC’ name.
Provided your company meets the minimum share capital and other statutory requirements, this means that it may be time to not just think about becoming a PLC, or becoming a PLC in name only, but to brace the company for very challenging, but equally beneficial, change.
Public company limited by shares FAQs
Can a private company be a company limited by shares?
A private company can be either limited by shares or limited by guarantee. When limited by shares, members own the company proportionate to their individual shareholding, although any liability for debts is limited to the amount payable on those shares.
Who owns a private company limited by shares?
As a distinct legal entity, the assets of a private company limited by shares are strictly owned by the company itself, and not by the shareholders individually, although the shareholders together have proprietary ownership of the company through their ‘equity’.
What are the requirements of a private company limited by shares?
There are a number of requirements to set up a private company limited by shares, including at least one director and one shareholder, although these can be the same individual. The company must also be registered with Companies House.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.