The majority of companies in the UK are incorporated as private limited companies.
The initial decision to incorporate as a private limited company does not preclude a company from subsequently becoming a public limited company.
This decision will require an understanding of the differences present between the two structures and an evaluation of whether the change is a valid option for the particular company. The purpose of this blog is to assist with that evaluation.
The first difference between a private limited company and a public limited company is highlighted in the requirements for the filing of accounts. A public company must file its accounts with Companies House within 6 months after the end of its accounting period, as per the Companies Act 2006. These accounts will need to be laid out in a General Meeting not later than 6 months after the end of the accounting period. On the other hand, a private company must file with Companies House within 9 months of the end of the accounting period and the requirement of the full accounts can be relaxed for micro-entities, small and medium sized companies. There is no requirement for the accounts to be laid out in a General Meeting.
Public limited companies come with a greater administrative burden.
For example, they must must hold an Annual General Meeting every year and public companies may not use written resolutions in their decision-making processes.
The presence of a single director in a private company will suffice and fulfil the requirements of the Companies Act 2006, while for a public company it has to be a minimum of two. Similarly, a private company no longer needs to have a secretary but a public company must have one and that secretary must be suitably qualified.
Strict rules apply to the share capital of public companies.
A public company must have allotted a share capital up to the authorised minimum of£50,000.The shares allotted will need to be paid up to 25% of their nominal value with the whole of any premium on them. These requirements are not needed for a private company, leaving the possibility of having only a small amount of shares issued in the company.
A similar approach is taken in respect of private and public companies as regards pre-emption rights. Pre-emption rights are rights retained by a shareholder of the company to acquire new shares issued by the company before a person who is not already a shareholder. Both private and limited companies are able to disapply rights of pre-emption by special resolution, or exclusion from the articles of association.
Additionally, the members of a public entity will need to follow the Disclosure and Transparency Rules, the EU Market Abuse Regulation and the Companies Act 2006.
Here is an overview of the advantages and disadvantages of private and public companies.
Advantages of a Public limited company:
- More capital since it is possible to have other investors that are interested in public companies. The ability to sell shares publicly is a great advantage.
- More attention and prestige. The status of a public company will be enhanced due to hedge funds and traders taking note of the business.
- Diversification from competition is another great advantage of public companies. As explained before, the majority of the companies in the UK are incorporated as private companies. Diversification with the public status will reduce the competition and enhance publicity.
- The change in structure does not mean that the company is forced to sell their shares on the market but retains the possibility of listing in the future.
- Spreading the risk through a higher number of shareholders is an advantage that should be taken into consideration. The higher the number of shareholders the lower is the singular risk of each of them.
Disadvantages of a Public limited company:
- Regulation is quite tight on the structure and running of the company. There are more legal requirements that will need to be fulfilled and this will all be under the public eye.
- Complete transparency is requested. This important point is positive for investors, but can be seen as negative for the company itself.
- Loss of control and ownership issues might arise between the directors or founders of the company. A private company has the capacity to be selective on the people that are admitted, while in a public company it is more difficult to control who is becoming a shareholder and who the directors need to be accountable to.
- Pressure can be increased due to the value of the shares declaring the value of the company itself and affecting the expectations of possible investors. Investors will be able, through the transparency requirement, to investigate the target before making an offer and this might be reflected by the value of the shares and the subsequent dividends connected.
- Further regulations apply to public companies, Stock Exchange Market Rules are one of the examples that should be mentioned as well as the Financial Market Authority.