Whether to stay private or “go public” is a common question pondered by many expanding businesses across the UK. While most incorporated entities in the UK are private limited companies (LTD), to achieve the next level of growth and investment, some will make the bold step to become a public limited company (PLC). Before making the decision to switch from a private limited company to a PLC, it is important to understand the differences, the legal and financial implications, and the advantages and disadvantages of each company type.
What is a private company?
In the UK, most companies are established as private limited companies (LTD). Private limited companies are legal entities with their own rights, assets, profits and liabilities. Because a private limited company is a separate legal entity, the personal liability of company owners (i.e. shareholders) is strictly limited to the value of their shares. Unlike public companies, private company shares cannot be sold to the general public.
Private limited companies can be limited by shares or limited by guarantee. Being limited by shares means that the company has shares and shareholders and can retain any profits it makes after paying taxes. Private limited companies limited by guarantee are “not for profit”, meaning that they have guarantors and reinvest any profits made.
Private limited companies are only legally required to have one director as a minimum (this must be a natural person) and may optionally have a company secretary. In most cases, directors of private limited companies are sole or primary shareholders.
What is a public company?
Public limited companies (PLCs) raise capital from public investment. Like private companies, PLCs are legal entities with their own rights, assets, profits and liabilities. A PLC can offer its shares to the public in accordance with the Companies Act 2006, but it must have allotted share capital with a nominal value of at least £50,000. Many PLCs choose to sell and list their shares on an exchange (e.g. FTSE or AIM), but not all choose to do so.
Public limited companies are legally required to have a minimum of two directors and a company secretary with the necessary professional qualifications to carry out this role.
What are the similarities between private and public limited companies?
There are several key similarities between private limited companies and public limited companies, as follows:
- Both are governed by the Companies Act 2006
- Both are distinct legal entities with their own rights, assets, profits and liabilities.
- The liability of shareholders of private limited companies and public limited companies is limited to the value of the shares they hold.
- Both must both be registered with Companies House and must prepare a memorandum and articles of association.
- Both must adhere to strict annual filing requirements, including confirmation statements, annual accounts, and tax returns.
Private vs public limited companies – what are the differences?
There are several important differences between private limited and public limited companies, as set out in the table below:
|Private Limited Company
|Public Limited Company
|Can shares be offered to the public?
|No. According to section 755 of the Companies Act 2006, a private company must not offer its securities to the public (or any section thereof) or allot or agree to allot any securities of the company with a view to their being offered to the public
|Yes, there is no restriction on the offering of PLC shares to the public
|How many directors are required as a minimum?
|Is a company secretary required?
|Yes – must be appointed at all times
|No statutory procedure under the Companies Act 2006
|Yes, there is a statutory procedure under the Companies Act 2006
|Is an AGM required?
|Optional unless articles specify otherwise – normally, 14 days notice required
|Yes – normally, 21 days notice required
|Short notice meetings
|Meetings can be held with shorter notice than 14 days if agreed to by a majority in number of the members having a right to attend and vote at the meeting and representing the requisite percentage (being 90% or such higher percentage (not exceeding 95%) as may be specified in the articles) in nominal value of the shares giving a right to attend and vote at the meeting.
|AGMs can only be held at short notice if all members entitled to attend and vote at the meeting agree to the shorter notice of fewer than 21 days General meetings can be held at shorter notice than 14 days if agreed to by a majority in number of the members having a right to attend and vote at the meeting and representing the requisite percentage (95%) in nominal value of the shares giving a right to attend and vote at the meeting.
|Minimum number of members
|Minimum share capital
|Before a trading certificate is issued, the company must have an authorised minimum allotted share capital of a nominal value of at least £50,000
|Can shares be bought back out of capital?
|Yes, private limited companies can buy back their own shares out of capital.
|No, public limited companies cannot buy back their own shares out of capital.
|Time to deliver accounts to Companies House (after the first accounts)
|Period for filing accounts is nine months after the end of the relevant accounting period
|Period for filing accounts is six months after the end of the relevant accounting period
|How long must accounting records be preserved?
|Is a trading certificate required?
|In accordance with section 761 of the Companies Act 2006, before a public company can trade or do business, it must satisfy the authorised minimum share capital requirements and have a trading certificate
What are the advantages and disadvantages of “going public”?
Perhaps the biggest advantage of going public is the ability to raise capital as a means of funding expansion into new markets, acquisition, research and development, and overall growth. Money raised by offering shares to the general public can also be used to repay company debts, thereby improving the financial position of the company.
Initial public offerings (IPOs) can also provide much-needed public awareness and exposure for companies that decide to switch from a private to a public, corporate entity.
Switching from a private limited company to a public limited company is a commonly used exit strategy for company members and shareholders, allowing them to realise the full value of their efforts. Other advantages include the ability to offer shares to employees and contractors, greater assuredness of the company’s value, and a higher share value compared to private companies.
While there are many advantages of going public, this is not for everyone. It is important to bear in mind that the process of going public through an IPO is a costly and time-consuming one. Even if you do reach the point of an IPO, there is no guarantee of success when placing your company shares on the open market.
Another key consideration is that the rules and regulatory requirements for public companies are more onerous compared with those of private limited companies. And perhaps most importantly, by offering share ownership to the general public, public companies have less autonomy than private companies. As a result, those running public companies have less decision-making power and overall control. Other disadvantages of public limited companies include:
- Higher level of overall disclosure relating to financial performance, strategy, and pay
- Higher management costs
- Higher risk of losing control of the company if an investor with large financial reserves or a group of investors decides to purchase a large proportion of shares allowing them to own a controlling stake
How can a private limited company become a public limited company?
In accordance with part 7 of the Companies Act 2006, an already registered and incorporated company can re-register as a different type of company; this is referred to as “alteration of status by re-registration”. A company can alter its status in any of the following ways:
- from a private company to a public company
- from a public company to a private company
- from a private limited company to an unlimited company
- from an unlimited private company to a limited company, or
- from a public company to an unlimited private company
To change from a private limited company to a public limited company, a special resolution must be passed by at least 75% of shareholder votes. A re-registration form (Form RR01) must also be prepared and submitted to Companies House.
Making the decision to switch from a private limited company to a public limited company structure is an important one that requires careful consideration. Going public through an IPO, if timed correctly and with professional advice and guidance, has the potential to launch existing private limited companies to the next level.