public companies

LEARNING OBJECTIVES

By the end of this topic, you should be able to;

• Define public limited company
• Explain the characteristics of public companies.
• Discuss the formation and management of public companies.
• Discuss initial public offer and why companies go public.
• Discuss the sources of capital for public companies.
• Explain the advantages and disadvantages of public companies.

A public company can also be referred to as a publicly traded company, publicly listed company, publicly held company, or public limited company. It is a company where ownership is organized through shares of stock which can be traded freely in over-the-counter or on a stock exchange market. A public company can be listed or unlisted public company. Listed public companies trade their shares publicly while unlisted companies are not listed on a stock exchange market. In some jurisdiction, it is a requirement for companies to be listed on an exchange market once they reach a certain size.

Public companies are established within the legal framework of particular countries or states, and therefore they might have little differences. For example, in the United States, a public company is normally a type of corporation (note that a corporation does not need to be a public company), but in the United Kingdom it is normally a public limited company. The general idea of public companies is similar but there exist meaningful differences.

FORMATION OF PUBLIC COMPANIES

The legal requirements for the formation of a public company are different in different states. For example, some states have a minimum requirement of 7 members for a public company while others do not. Different regulatory authorities like the registrar of companies and the securities and exchange commission are tasked with ensuring that public companies meet all the requirements to operate. Some of the requirements for opening a public company include;

• Memorandum of association
• Articles of association
• List of directors
• Directors declaration

On approval, the registrar of the company issues the certificate of incorporation.

After raising the required capital, it is then issued with a certificate of trading. Note that the public company must get the certificate of trading before it starts operating.

INITIAL PUBLIC OFFER (IPO)

An initial public offering is the process of availing shares of a private company to members of the public for the first time. An initial public offering enables a company to raise capital from public investors. For companies to hold an initial public offer they must meet all the requirements by the securities and exchange commission.

Before an initial public offer, a company is considered private. Before an initial public offer, a private company is grown by a small number of shareholders. An initial public offer is a big step for a company as it grants access to the company to raise a lot of money. This puts the company in a better position to grow and expand. When a company decides to go public, privately owned shares are converted into public ownership and are worth the public trading price.

A public company is required by the securities and exchange commission to report to members of the public including their finances.

REASONS WHY COMPANIES GO PUBLIC

There are different reasons why different companies go public. Some of the main reasons include;

• To raise capital and broaden future opportunities of raising capital.
• To increase the liquidity of the stock of a company. This allows stock owners to trade their stock with ease.
• To acquire other businesses using the stock of the company.
• To create brand awareness, prestige, and publicity for a company.
• To attract as well as compensate employees with public company stock options.

OWNERSHIP

A public limited company is owned by the shareholders. A share is a unit of ownership. The people who buy shares from the stock exchange market automatically become owners of the company they buy shares from.

SOURCES OF CAPITAL

The sources of capital of public limited companies include:

• Sale of shares
• Borrowing from financial institutions
• Trade credit
• Retained profits
• Leasing and renting of company assets

MANAGEMENT

Public limited companies are managed by a board of directors and hired professional managers.

DISSOLUTION

Public limited companies may be dissolved due to any of the following reasons:

• De-registration of company
• As a result of creditors action
• Through a court order
• Through a resolution by members to dissolve company
• As a result of creditors actions

FEATURES OF A PUBLIC COMPANY

• The company is a separate legal entity from its composing members.
• Its formation, operation, and dissolution are strictly governed by laws and regulations.
• A public company must have at least seven members, but there is no maximum to the number of members.
• Company generates capital through the sale of shares. Those who buy shares are known as members. The amount collected is known as share capital.
• Company shares are freely transferrable.
• Members of a company have limited liabilities. The liability of a member is limited to the value of shares under his/her ownership.
• Ownership is separate from management. The shareholders are not required to take part in day to day running of the company.

ADVANTAGES AND DISADVANTAGES OF PUBLIC COMPANIES

Advantages

• They have the ability to raise large capital.
• They employ specialized personnel.
• Members have limited liability.
• Free transfer of shares by members.
• The companies are separate legal entities from their members.

Disadvantages

• Decision-making process is long.
• Lack of secrecy.
• Lack of personal contact with the customers.
• Lengthy legal procedures required during formation.
• Shareholders do not have a say in the day to day running of the business.

Note that, the term limited is used in some countries to show that a company has limited liabilities. It represents a legal structure that makes sure that a company's liability is limited to the stake of members in the company. Therefore, public limited companies and public companies are the same.