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Limited companies come in two forms: private and public. The main difference is that public companies can sell their shares on a stock exchange, like the London Stock Exchange. However, the real legal distinction between the two is that public companies are permitted (but not obligated) to offer their shares to the public. In contrast, private limited companies cannot offer their shares to the public at all. So, before listing your company on a stock exchange, you must fulfil all the necessary conditions to become a public company. This article will provide an overview of the key differences between public and private companies.
Public Companies
Interestingly, the law defines private companies as those companies that are not public companies. Therefore, when comparing the two, we can define private companies entirely in opposition to public companies.
As mentioned, public companies are not required to list on the stock exchange. From a legal perspective, you can think of public companies as those that have complied with all the additional requirements and rules that enable them to sell their shares to the public. These rules aim to promote increased transparency.
Advantages of Public Companies
Raising Public Equity
For many private companies, it is hard to raise equity financing unless they are willing to sell a substantial number of shares to accredited private investors, like private equity and venture capital funds. This is because it is illegal for the directors of a private company to offer their shares to the public.
If a court finds that a private company has offered its shares to the public, it has great power to penalise the company. Therefore, one of the main advantages of trading through a public company is that you can raise more money by selling your shares to the public.
Prestige
Since the rules for listing your company’s shares on a public market are quite onerous, public companies are fewer and farther. In a sense, they are more prestigious. Your company may therefore find it easier to raise both debt and equity financing simply because it is a public company.
Listing Shares on the Stock Market
By virtue of being a public company, you can offer your shares to the public. One of the best ways to do this is to list them on one of the two exchanges in the UK:
- Main Market of the London Stock Exchange; and
- Alternative Investment Market (AIM).
The Main Market has more onerous listing requirements than the AIM, and it is easier to raise money on the Main Market. Still, both markets make it easier to raise equity than a private company.
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Disadvantages of a Public Company
Public companies are far more difficult to administer than private companies because the law requires that they operate at a higher standard. Likewise, a public company must provide shareholders with more information.
For instance, there must be at least two directors of a public company, whereas, for a private company, you can be the sole director of a company. The premise is that if your company is going to offer its shares to the public, most of the shareholders will not have the capacity or ability to be directly involved in the affairs of the company. Therefore, the law protects the public shareholders’ interests by requiring the company’s officers (i.e. its directors and secretary) to operate with more rigour.
Public vs Private Company
We will now go on to explore how administering a public company differs from a private one.
Accounts
The law requires public companies to file their accounts more frequently than private companies. The company’s accounts must likewise be presented at a general shareholder meeting within six months of being due.
Limits on Directors’ Powers
Compared to private companies, the law restrains some of the powers of public company directors. In particular, shareholders must approve any loan made to a director by a public company. However, directors of public companies will still have more reporting requirements than shareholders.
Secretary
A public company must have a secretary in addition to at least two directors. Their exact duties will depend on the company. Still, in general, company secretaries are responsible for ensuring that the directors comply with their duties, such as ensuring that shareholder and director meetings are appropriately administered.
Restrictions on Share Capital
Share capital refers to the amount of money within a company that belongs to the shareholders. For public companies, there must be at least £50,000 worth of share capital, and this amount must be fully “paid up”. This means that the shareholders must have actually paid the company for their shares.
There are also limits on the consideration shareholders can provide the company in exchange for shares. In practice, shareholders will be restricted to cash or cash equivalents unless they obtain a report on the true value of the consideration.
For example, suppose directors wanted to issue a shareholder 100 shares for a piece of intellectual property. In this situation, an accountant or other qualified valuer would have to certify that the intellectual property is worth 100 shares in the company.
City Code on Takeovers and Mergers
The City Code on Takeovers and Mergers is a large collection of rules on how one company can purchase another company. The City Takeover Panel, which is a quasi-public body, is responsible for enforcing the Code.
If a company is public, it is subject to the Code. Meanwhile, private companies are usually exempt.
Key Takeaways
Public companies are those that meet the requirements to list their shares to the public. While it is not a requirement for public companies to sell their shares on a UK stock exchange, most do because it grants them access to the public equity market. Many companies go public by listing as a public company after they have completed all the necessary steps to do so. As a result, they are subject to far more regulations and regulatory scrutiny compared to private companies.
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Frequently Asked Questions
A public company is a company that the law permits to offer its shares to the public. Importantly, a public company does not have to be listed on a stock exchange to be a public company, though most companies choose to do so.
Other than having the right to sell its shares to the public, public companies are much more regulated than private companies. For example, they must make more information about its dealings available to the public. There are also restrictions on the powers of directors of public companies.
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