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GCSEBusinessEdexcelRevision Notes2. Building a Business2.1 Growing the BusinessPublic Limited Companies (plc)

Public Limited Companies (plc) (Edexcel GCSE Business) : Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

Updated on

Becoming a public limited company (PLC)

  • When a business is growing rapidly, it may require a significant amount of capital to fund its expansion

  • To secure this funding, it may choose to transition from a private limited company (LTD) to a public limited company (PLC)

  • This is a complex process with many legal requirements and involves undergoing a stock market flotation

    • The top three initial public offerings as of March 2023 are:

      • The Saudi Arabian oil company, Saudi Aramco, raised $29.4 billion in its IPO in December 2019

      • The Chinese e-commerce company, Alibaba Group, raised $25 billion in its IPO in 2014

      •  The Japanese telecommunications company, SoftBank Corp., raised $23.5 billion in its IPO in 2018

Advantages of becoming a public limited company

Advantage

Explanation

Access to capital

  • Significant amounts of capital can be raised very quickly

  • This is often a more cost effective way to raise capital than borrowing money from banks or other lenders

Shared risks

  • The risks associated with ownership are spread among a larger group of shareholders

  • This reduces the financial risk to any individual

Increased liquidity

  • A company's shares become more liquid (they can be bought and sold more easily) on a public stock exchange

  • This can increase the value of the company's shares and make it easier for shareholders to buy/sell shares

Extended decision-making

  • The company will have a board of directors made up of individuals from outside of the company management, and representatives from major shareholders

  • This can extend the decision-making process and bring in additional expertise and perspectives that can help the company grow and expand

Greater public profile

  • Becoming a PLC can raise a company's public profile and increase its visibility with customers, suppliers, and potential investors

  • This increased visibility can help the company attract new business and grow its customer base

Disadvantages of becoming a public limited company

Disadvantage

Explanation

Increased regulation

  • The business is required to adhere to a range of legal and financial regulations which can be costly and time consuming to comply with. They include:

    • Completing regular financial reports

    • Maintaining accurate accounting records

    • Holding annual general meetings

Loss of control

  • Selling shares to the public means that it will have many shareholders who will have a say in how the company is run

  • The business's founders may find that decisions are made by a board of directors, or a CEO whom they appoint

    • E.g. Steve Jobs was famously fired by Apple in 1985 and only returned in 1997

Costly to set up

  • Setting up a public limited company can be expensive, including

    • Fees for legal and accounting advice

    • The costs associated with the initial public offering (IPO)

Market pressure

  • PLCs are expected to deliver consistent growth and profits to their shareholders

  • This can pressure on the management team to prioritise short-term financial performance (e.g. paying staff less) over long-term strategic planning (retaining talented staff)

Risk of hostile takeover

  • With publicly traded shares, a hostile takeover by a competitor is always a risk

  • Kraft bought a controlling interest in Cadbury's in 2010 in a move that caught markets by surprise

Examiner Tips and Tricks

When justifying the best type of business ownership to be used in a particular situation (or if a business should change its ownership structure), the decision needs to consider any evidence provided about the business owner, the product, the nature and size of the market, the funds required, and the level of profitability.

For example, a business which is generating sales of £30k a year is unlikely to be ready to become a public limited company, but it may well benefit from transitioning from a sole trader to a private limited company.

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    Author
    Reviewer
    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

    Jenna Quinn

    Reviewer: Jenna Quinn

    Expertise: Head of Humanities & Social Science

    Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.