Companies can either have limited or unlimited liability. A registered company is treated as an artificial person, meaning that all of its taxes and documents must be filed with the appropriate authorities. The company is separate from its owner, and as long as proper documentation and taxation is maintained, the owners won’t be directly liable for the dues.
Understanding the difference between a limited liability concern and a company with unlimited liability is very important. Before we talk about public limited companies, it is important to have a clear understanding regarding the ownership of the business first.
Limited Versus Unlimited Liability
A company with unlimited liability is usually owned by a sole trader. Sole traders who run smaller businesses such as shops and stores are usually the ones with unlimited liability. Basically, what that means is that in case the company shuts down, the owners of the business will be responsible for paying off all the dues.
They will have to personally settle the affairs of the company and make sure that all creditors have been paid off. This often means having to sell off personal assets or giving money out of pocket to settle the affairs of the business.
On the other hand, limited liability means that the funds will only be returned from the company’s accounts. The owners of the company, or the directors, are not responsible for returning the money since the company is technically a separate entity, and considered an “artificial person.”
Understanding Private Limited Companies
To understand a public limited company better, it’s important to focus on private limited companies first. A private limited company is a registered business in which shares of the ownership of the company are distributed between a group of people. It could be either between one person and their family members, or several members or friends could have joint ownership.
The distinctive factor here is that in a private limited company, the shares cannot be sold outside of a group of people. For instance, in case one partner wants to pull out or wishes to retire, or passes away, their shares will be passed onto their legal heirs. They cannot simply be sold to the general public.
The company is registered with the local authorities, and must abide by the Company Law set in place in the jurisdiction they are trading in. Capital must be brought in by the joint investors of the company and the partners are going to receive profits depending on the number of shares they own in the company.
The Distinction with Public Limited Companies
Public limited companies are quite similar to private limited companies. The personal liability of those who started the business or those who run it is still limited, and they are still required to register with the relevant authorities. However, the major advantage here is that raising capital is now considerably easy.
By offering its shares to the general public, a company can easily raise considerable amounts of revenue that it can then use for investing in larger projects and growing its business. To set up the company as a public limited concern, there are separate requirements for different countries.
There are some important factors to take into account with switching to a public limited status for a larger business. First of all, instead of ownership being controlled by a handful of people at the top, the general public now has shares, and as such, is liable to seek representation in the form of directors.
The Key Distinctive Points
When a company goes public, a board of directors is appointed. This board of directors acts as stewards for the owners (general public), and have a fiduciary responsibility to ensure that the public money is used in the right manner. There are strict legal requirements that companies must adhere to, such as publishing audited financial statements.
These audited financial statements are then made available through the stock exchange so that the average investor can make a decision about whether they want to invest in the company or not. The public’s money is heavily protected and regulated, and the Securities and Exchange Commission plays an important role in regulating the flow of information.
Why Become a Public Limited Business?
There are many reasons why businesses prefer going public. Public limited companies are, first and foremost, separate entities, so the owners are not legally or financially liable for any losses generated by the business. There are several other reasons why a business would want to switch its legal status to public limited.
Greater Financial Input
The biggest reason why companies go public is because they are able to generate more money from a share offer. More importantly, since they provide all relevant information to the investors beforehand, they have a much greater choice of investment available to them. This allows them to use the money to fund new projects and fuel business growth.
Businesses that go public have to go through a huge number of legal hoops. It is common for people to think that these are established businesses, and many ultimately believe that these businesses are much more prestigious than private businesses. After all, if the public has a share in the company, it must be doing something right!
A major reason why public limited companies are so big is because the responsibility is shared among so many different members. In case the company suffers a loss, it’s going to impact the share price. That’s not all, during the annual general meeting, all of the members and the board of directors can sit together to discuss ideas and plan a course of action for the next year.
By getting input from different members and people, the company is able to perform much better.
All of the financial reports submitted by the company are carefully audited. In fact, there is a legal stipulation that public limited companies must hire certified auditors to audit their financial statements before releasing them to the general public. An audit helps bring greater transparency to the company’s business processes and financials.
The company has to pay taxes on its taxable profits only, so they are able to gain benefits from several tax deductible costs and allowances as well. There are plenty offered by local governments for public and private limited companies, so it’s a great way to help your business grow.
It’s easy to understand that the benefits of becoming a public limited business far outweigh the negatives, but it’s also equally important to factor in the position of the company. Do you really need to seek external investment? Is your business really interested in going public?
Usually, when companies are seeking long-term capital and do not want to go into debt, they think about going public. It’s a fantastic way for the public to gain dividends and profits from the company as well.