Public vs. Private Limited Companies

The Private Limited Company (Ltd): Control and Privacy

The vast majority of companies in the UK are private limited companies. This is the default structure for most startups, family businesses, and small to medium-sized enterprises (SMEs). Its defining feature is that its shares are held privately; they cannot be offered for sale to the general public.

To understand the core features, advantages, and disadvantages of an Ltd, let's start with a video overview.

As the video explains, the private limited company structure offers a balance between the formal protection of limited liability and the operational flexibility needed by smaller businesses. Let's synthesise the key characteristics:

• Ownership & Share Trading: Shares are owned by a relatively small number of private individuals or other companies. They can only be transferred privately, often requiring the approval of other shareholders.
• Raising Capital: This is the main constraint. Capital is raised from the founders' own funds, private investors (like "angel investors" or venture capitalists), and bank loans. They cannot access the huge pools of capital available on public stock markets.
• Control: The founders and initial investors typically maintain tight control over the company's direction. There is less risk of hostile takeovers or pressure from a large, dispersed body of external shareholders.
• Regulatory Burden: While Ltds must register with Companies House and file annual accounts, the requirements are less onerous than for PLCs. For example:
  • There is no minimum share capital requirement.
  • Only one director is needed.
  • An annual audit is not required unless the company exceeds a certain size threshold (e.g., turnover above £10.2 million).
  • Annual General Meetings (AGMs) are not mandatory.

The Public Limited Company (PLC): Growth and Scrutiny

When a company reaches a size where its need for capital outstrips what private markets can provide, it may consider "going public" and becoming a Public Limited Company. This transformation allows it to offer shares to the general public on a stock exchange, like the London Stock Exchange.

The following video discusses the fundamental differences between public and private companies, particularly from a financial market perspective. While it uses US examples like the SEC (Securities and Exchange Commission), the principles are directly applicable to the UK's FCA (Financial Conduct Authority).

Becoming a PLC is a transformative event. It unlocks vast potential for growth but comes at a significant cost in terms of control and compliance.

• Ownership & Share Trading: Shares are freely transferable and can be bought and sold by anyone on a public stock exchange.
• Raising Capital: This is the primary advantage. A PLC can raise substantial amounts of capital by issuing shares to the public through an IPO and subsequent share issues.
• Control: The original owners' control is diluted as ownership spreads among thousands of public shareholders. The company becomes more vulnerable to takeover bids and must answer to its shareholders, who can vote on key decisions.
• Regulatory Burden: The compliance requirements are far stricter, designed to protect public investors.
  • In the UK, a PLC must have a minimum share capital of £50,000, of which at least 25% (£12,500) must be paid up.
  • It must have at least two directors and a qualified company secretary.
  • It is subject to stringent rules from regulators like the FCA and the London Stock Exchange.
  • It must publish detailed, audited financial statements and hold an AGM for shareholders.

Head-to-Head Comparison

To consolidate these points, let's review a detailed comparison of the features of PLCs and Ltds.

The differences discussed in the article are neatly summarised in the table below. This provides a clear, at-a-glance reference for the key distinctions that you are expected to know for the CB1 exam.

Practical Application: An Exam-Style Question

Let's apply this knowledge to a typical exam scenario. This type of question tests your ability to recommend a business structure based on its financing needs.

Analysis of the Question:
The business has three key considerations, but one is decisive:

1. They want limited liability. This rules out a sole tradership or a standard partnership, but leaves LLP, Ltd, and PLC as possibilities.
2. They need to raise £200 million. This is a very large sum, difficult for an Ltd to raise privately.
3. They expect at least 40% of the funding (£80 million) to come from equity raised through a Stock Exchange.

This third point is the critical factor. The ability to issue shares on a stock exchange is the exclusive domain of a Public Limited Company (PLC). Therefore, despite the complexities, a PLC is the only structure that meets their stated funding requirements.

Conclusion

We have now clearly distinguished between the two main types of limited companies. The choice is fundamentally a trade-off between control and capital.

Key Takeaways:

• Private Limited Companies (Ltds) offer limited liability with greater privacy, tighter control for the owners, and a lower regulatory burden. Their ability to raise capital is constrained to private sources.
• Public Limited Companies (PLCs) have unparalleled access to capital from the public via stock exchanges, enabling significant growth and expansion. This comes at the cost of diluted owner control, intense public scrutiny, and a heavy compliance and reporting burden.
• The decision to become a PLC is driven by a need for capital that cannot be met by private means, as illustrated in the exam question.

In our previous lesson, we saw the consequences of company failure. In this lesson, we've defined the main types of companies. In our next session, we will bring these themes together by examining the precise priority of claims in a company liquidation, detailing the "pecking order" for how different creditors and shareholders are paid when a company is wound up.