Limited companies have either Ltd. or PLC after their names, so people trading with them know that these companies have limited liability. As limited liability may make it harder to get all of your money back, if the firm goes bankrupt, because the owners’ private assets cannot be ‘touched’ to repay the company’s debt.
In addition to limited liability of the owners, private limited companies and public limited companies share many features. There are also some important differences between a private limited company and a public limited company. Let’s take a look.
Similarities between private and public limited companies
Legalities. To form a limited company, two legal documents need to be completed: A Memorandum of Association and The Articles of Association. They must be registered when setting up the business.
Ownership. Limited companies are owned by ordinary shareholders.
Shares. The business is divided up into equal pieces (called shares). The more shares you own, then the more of the company you own. Each share entitles you to one vote at the Annual General Meeting (AGM), or in an emergency at an extraordinary general meeting on who will be the directors.
Limited liability. All shareholders have limited liability meaning that if the business fails, they only risk losing the value of their shares – the amount of money they have invested in the company.
Continuity. The business continues its operations even if one or more shareholders pass away or retire.
Ability to raise finance. The company can raise finance by selling its shares to other individual people or organizations. Shareholders invest their capital by purchasing shares in the company.
Profit. Profit belongs to the business and is divided between ordinary shareholders.
Dividends. Net Profit After Interest and TAX is shared between the shareholders through the payment of dividends. A dividend is the slice of profit paid to the owner of each share. Each share also entitles you to one dividend, so the more shares you own, the larger your share of the profit.
Decision-making. Shareholders vote on major decisions taken by the company, e.g. appointing directors.
Final Accounts. At the end of fiscal year, financial statements must be prepared, audited and submitted to the correct governmental authorities.
Differences between private and public limited companies
Size. A private limited company is usually a fairly small and medium-sized business. They tend to be smaller than PLCs, but there is no reason why they have to be. A public limited company is the most common form of organization for a very large companies, especially multi-national businesses. These are the big famous companies that you have heard of, but they actually only make up a small percentage of all companies on the market.
Sale of shares by the company. Shares in a private limited company can only be sold privately, often to family members, friends or employees of the business. In a private limited company, it is often difficult to sell shares as shares can only be bought and sold privately, and with the agreement of other shareholders. On another hand, shares in a public limited company can be sold to the general public and other business organizations such as investment companies. In a public limited company, it is very quick and easy to sell shares, as they can be offered for sale to the general public making it possible for anyone in the world to buy them via the stock exchange.
Number of owners. In a private limited company, there is usually a very small number of shareholders who are often members of the same family. In a public limited company, there is usually a very large number of shareholders.
Control. In a public limited company, only a few shareholders control the business. If one shareholder may own 51% of the shares or more in the company, he has control over major decisions in the business. Also, ownership is not separated from control. In a public limited company, there are often thousands or hundreds of thousands of shareholders spread around the world.
Business objectives. In private limited companies, the owners wish for stability and for their business to grow sustainably. They reinvest a big part of the profit back into the business for future growth. They most likely work for the business and receive a good salary, therefore do not need such big dividends to be paid out. In a public limited company, shareholders want more dividends. As they do not work in the company, in a PLC, shareholders do not have any loyalty to the company, but just see it as an investment.
Raising additional capital. In a private limited company, it is quite difficult to raise additional capital as shares cannot be sold freely to the general public. In contrary, people buy shares in PLCs because they hope to receive dividends (a share of the profits), and secondly for capital appreciation (buy shares cheaply, and then sell them for a higher price, but beware the value of shares can easily go down as well as up).
Borrowing external finance. Because private limited companies are usually small with low value of their assets to offer as collateral, raising large amounts of money is often difficult. Public limited companies can raise large sums at lower rates of interest because of their reputation and valuable collateral.
Secrecy. In a private limited company, the final accounts do not need to be made public, except being scrutinized by the governmental organizations. The company’s financial accounts in public limited companies, must be made available for the public to look at by anyone at any time.
