Private & Public Limited Companies (Edexcel IGCSE Business)
Private limited companies
Spec point —
1.2.1· The main types of business ownership: • limited companies (private and public) Definition, features, +'s and -'s"
Private limited companies
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A private limited company is a business that is owned by one or more shareholders whose responsibility for debts is limited to the level of their initial investment (the price they paid for the shares)
- The business name is suffixed with 'Limited' or 'Ltd' in the UK and S.A. in Spain
- Shareholders are often family members or close friends
- Shareholders are usually also directors who run the business on a day to day basis
- Private limited companies are registered with Companies House and need to submit details of financial performance and changes in ownership each year
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Private limited companies may be more suitable than sole traders or partnerships if setting up the business involves significant capital investment, or involves some risk
- The owners personal assets are protected as they have limited liability
- Most private limited companies are owned and controlled by just one person (just like sole traders) who has made the decision to reduce their personal financial risks by forming a company that provides them with limited liability protection
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In some countries it is possible to form a limited liability partnership
- Sleeping partners invest money but take no part in decision-making
- At least one partner must continue to accept unlimited liability
Advantages and disadvantages of private limited companies
| Advantages | Disadvantages |
|---|---|
| - Shareholders benefit from limited liability for debts incurred by the company - Access to greater finance from investors and lenders who consider limited companies to be less risky - Ownership can be easily transferred by selling shares - Business continuity as the business does not die with its original owner | - More expensive and time-consuming to set up as legal advice is often required - More complex operational rules than sole traders or partnerships - Annual financial reporting and auditing are required - Shareholders may have little control over the company, as the founder usually imposes their own agenda |
Public Limited Companies
Spec point —
1.2.1· The main types of business ownership: • limited companies (private and public) Definition, features, +'s and -'s"
Public Limited Companies
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Public limited companies are large businesses that sell shares publicly on the stock exchange (New York Stock Exchange; London Stock Exchange etc.)
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Public limited companies have the suffix 'PLC' in the UK, 'Inc' in the US and 'GmBH' in Germany
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Selling shares on the stock exchange for the first time is called flotation or going public
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Flotation is a complex legal process that allows large amounts of share capital to be raised
- E.g. When Google floated in 2004 $23 billion was raised in one day
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Advantages and disadvantages of public limited companies
| Advantages | Disadvantages |
|---|---|
| - Significant amounts of capital can be raised - Risks are spread among a large group of shareholders - Company shares can be bought and sold easily on a public stock exchange - A board of directors, made up of individuals from outside of the company management and major shareholders can bring in expertise/perspectives that can promote growth - PLCs have high visibility with customers, suppliers, and potential investors which can help grow its customer base - As large businesses PLCs may be able to dominate the market and benefit from economies of scale | - PLCs must comply with complex legal and financial regulations such as - Completing regular financial reports - Maintaining accurate accounting records - Holding annual general meetings - Setting up a public limited company can be expensive - Fees for legal and accounting advice - Costs of the flotation such as producing a prospectus - The management team are likely to prioritise short-term financial performance (e.g. paying staff less) over long-term strategic planning (retaining talented staff) so as to maximise profits for shareholders - Hostile takeovers are a risk as shares can be bought by rival businesses |
Public Corporations
Spec point —
1.2.1· The main types of business ownership: • public corporations Definition, features, +'s and -'s reasons for and against public ownership
Public corporations
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Public corporations are owned and controlled by the government
- They are usually funded through tax though some earn revenue from sales
- They operate as incorporated entities that are separated by law from the government
- Profits (surpluses) are reinvested in the business or returned to the government
- They exist to provide public services such as healthcare, transport and broadcasting services
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Some public corporations have a majority share ownership held by the government, but may have also sold a large number of shares (but less than 50%) to the private sector
Examples of public corporations
Healthcare
- Brazil offers free healthcare for all its citizens through the Sistema Único de Saúde (SUS)
Transport
- Türkiye Cumhuriyeti Devlet Demiryolları (TCDD) is Turkey’s government-owned national railway company
Broadcasting services
- The Canadian Broadcasting Corporation (CBC) operates television and radio networks funded by advertisements and government subsidies
Benefits and drawbacks of public ownership
| Benefits | Drawbacks |
|---|---|
| - Governments can maintain control of vital supplies such as water and services such as transportation - Public ownership avoids duplication where a natural monopoly exists such as power networks - Nationalisation saves jobs threatened by private sector business failure - Services that are not profitable enough for private businesses to provide can be made available | - Public corporations that make a loss are a cost to government - Some public services may operate inefficiently due to the lack of competition - Political interference can affect the operations of public corporations, particularly following a change in government - They may be difficult to control and coordinate due to their large size |
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Public ownership has generally declined in recent years
- Many state-owned businesses in Eastern Europe have been privatised since 1990 following the break-up of the Soviet Union
- Profitable organisations in sectors such as telecommunications in the UK and Australia have been transferred to the private sector, raising large sums of revenue for governments to spend on other public services
Exam Hint Many students confuse public limited companies with public corporations
An easy way to remember the difference is that COMPanies COMPete.
A public corporation is owned by every citizen - the public - but controlled on their behalf by the government
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