Choosing the right business structure is a critical decision for entrepreneurs, as it impacts many significant aspects of business operations. The two primary options are a Private Limited Company (Ltd) and a Public Limited Company (PLC). Each has distinct advantages and legal obligations that suit different business goals. This blog explores the key differences between these two structures, covering factors like capital raising potential, management control, regulatory requirements, and public image. We also discuss the key considerations that are crucial when choosing a business structure. By understanding these differences and considerations, you can make an informed choice that aligns with your business’s long-term vision and needs.
Understanding Private and Public Limited Structures
Understanding the distinctions between a Private Limited Company (Ltd) and a Public Limited Company (PLC) is crucial when deciding on the right structure for your business. This guide breaks down the key differences between public and private limited companies along with the critical factors to consider when choosing the right business structure for you.
For entrepreneurs seeking to establish their business, understanding the key distinctions between a Public Limited Company (PLC) and a Private Limited Company (Ltd) is essential. Each structure offers different benefits, limitations, and legal obligations, making it crucial to choose the one that best aligns with your business goals and growth strategy.
A Public Limited Company (PLC)
A Public Limited Company (PLC) is a business entity that allows its shares to be sold to the public on a stock exchange. The ownership of the company is divided among shareholders, who can freely buy and sell shares. A PLC is managed by directors appointed by the shareholders, and it is subject to stricter regulations due to its public nature.
A Private Limited Company (Ltd)
A Private Limited Company (Ltd), on the other hand, is a business structure that provides limited liability protection for its owners, meaning that personal assets are protected if the business faces financial trouble. Unlike PLCs, a Ltd cannot offer its shares to the general public; instead, ownership is typically held by a small, closely-knit group of shareholders.
Key Differences Between Private and Public Limited Companies
Ownership and Shareholder Structure
The most significant difference between a Ltd and a PLC lies in how shares are held and traded.
- Private Limited Company (Ltd): Ownership is typically restricted to a small group of individuals or entities. The shares in a private company cannot be offered to the general public, meaning the transfer of ownership is usually limited and tightly controlled.
- Public Limited Company (PLC): A PLC, by contrast, can have an unlimited number of shareholders. Its shares are offered to the public and traded on recognized stock exchanges. This means ownership in a PLC is much more fluid and can be spread across a vast number of public investors.
Management and Decision-Making
The approach to management also varies between private and public limited companies.
- Private Limited Company (Ltd): Management is often more closely tied to ownership in a private company. In many cases, the shareholders may also serve as directors, granting them direct control over the company’s operations and decisions. This leads to faster decision-making and a more flexible structure, ideal for small businesses.
- Public Limited Company (PLC): In a PLC, ownership and management are generally separate. Shareholders appoint a board of directors to manage the company’s affairs, while shareholders play a more passive role. This creates a more formal and hierarchical management structure, which can slow decision-making but provide greater accountability and oversight.
Disclosure and Transparency Requirements
Given that PLCs raise capital from the public, they are subject to far more strict regulatory requirements than Ltds.
- Private Limited Company (Ltd): Private limited companies are not required to disclose their audited financial statements to the public. This allows them a degree of privacy that public limited companies do not have.
- Public Limited Company (PLC): Public companies are obligated by the Bangladesh Securities and Exchange Commission (BSEC) to disclose their audited financial reports, including an auditor’s note and all relevant financial statements. This level of transparency is intended to protect investors and ensure public confidence, but it also imposes additional costs and administrative burdens on the company.
Capital Raising Capacities
The ability to raise capital is another key area where private and public limited companies differ.
- Private Limited Company (Ltd): Ltds generally raise capital through private means. Since they cannot offer shares to the public, their ability to attract large-scale investments is limited, which can make it harder for them to grow quickly.
- Public Limited Company (PLC): PLCs have far more flexibility when it comes to raising capital. They can issue shares to the public through Initial Public Offerings (IPOs) and sell shares on stock exchanges. Additionally, they can issue debentures, giving them a range of options to attract large-scale investment from both institutional and individual investors. This makes PLCs better suited to businesses looking for significant expansion and requiring substantial capital inflows.
Liability Protection
In both structures, shareholders enjoy limited liability protection, meaning their personal assets are shielded from the company’s liabilities.
- Private Limited Company (Ltd): The liability of shareholders in an Ltd is limited to the amount they have invested in the company. Personal assets are protected, even if the company were to face financial difficulties.
- Public Limited Company (PLC): Shareholders in a PLC also have limited liability. However, due to the public nature of the company, a PLC may face additional legal and financial responsibilities if its actions lead to damages or losses for investors or the public at large.
Shareholders and Directors
The minimum and maximum number of shareholders and directors required to establish and run a company varies between Ltds and PLCs in Bangladesh.
- Private Limited Company (Ltd): A private limited company must have at least two shareholders and two directors. The highest number of shareholders allowed is 50. This smaller shareholder base allows for more direct involvement in the business but it also limits the company’s growth potential.
- Public Limited Company (PLC): A public limited company must have at least seven shareholders and three directors, but there is no upper limit on the number of shareholders. The larger structure provides more opportunities for expansion and investment but also introduces more complexity to management.
Ability to Issue Shares to the Public
One of the defining characteristics of a PLC is its ability to issue shares to the general public.
- Private Limited Company (Ltd): Ltds are restricted from offering shares to the public. Any share transfers are generally subject to the approval of existing shareholders, and restrictions can be imposed through the company’s Articles of Association to control who can buy and sell shares.
- Public Limited Company (PLC): PLCs can freely issue shares to the public, making it much easier for them to raise capital. Shares in a PLC are listed on stock exchanges, and investors can buy and sell them without needing approval from other shareholders. This creates liquidity for investors and opens up the company to a wider pool of potential owners.
Commencement of the Business
The requirement to begin business operations also differs between private and public limited companies.
- Private Limited Company (Ltd): Once a company receives its Certificate of Incorporation from the Registrar of Joint Stock Companies and Firm (RJSC), it can immediately commence its business activities.
- Public Limited Company (PLC): In addition to receiving the Certificate of Incorporation, a PLC must also obtain a Certificate of Commencement of Business before it can begin operating. This additional step ensures that the company meets all legal and regulatory requirements before it starts trading.
Share Transferability
Share transferability is more restrictive for private companies.
- Private Limited Company (Ltd): The transfer of shares in an Ltd is often subject to restrictions, with existing shareholders typically having the right of first refusal before shares can be sold to outsiders. These rules are usually set out in the company’s Articles of Association.
- Public Limited Company (PLC): In contrast, shares in a PLC are freely transferable. Once a PLC is listed on a stock exchange, its shares can be bought and sold by anyone, providing liquidity for shareholders and greater flexibility for investors.
Managing Director Restrictions
There are certain restrictions placed on the managing director of a PLC, which do not apply to private limited companies.
- Private Limited Company (Ltd): The managing director of a PLC cannot serve as the managing director or manager of another company. If the company’s profits are insufficient, a minimum remuneration must be paid.
- Public Limited Company (PLC): These restrictions do not apply to Ltds unless they are subsidiaries of a PLC.
Voting Rights of Interested Directors
In PLCs, directors who have a personal interest in a contract or arrangement are restricted from voting on that matter.
- Private Limited Company (Ltd): This restriction does not apply, allowing directors more flexibility in participating in decisions even when have a conflict of interest.
- Public Limited Company (PLC): A director who is personally interested in a contract of agreement is prohibited from voting on that matter.
Rights of Preference Shareholders and Debenture Holders
Shareholders and debenture holders in both types of companies have rights regarding financial transparency.
- Private Limited Company (Ltd): Preference shareholders and debenture holders in an Ltd have the same rights as ordinary shareholders to access financial reports and statements.
- Public Limited Company (PLC): These rights are often more formalized and regulated in a PLC, ensuring that all shareholders and investors are kept informed about the financial state of the company.
Key Considerations When Choosing Between Private and Public Limited Companies
Deciding whether to establish a Public Limited Company (PLC) or a Private Limited Company (Ltd) depends on various factors that align with your business goals. Below is a list of essential considerations:
Capital
If your business requires substantial capital to grow, a PLC is better suited as it allows you to raise funds by selling shares to the public. On the other hand, if the capital requirement is modest, an Ltd can meet your needs without the complexities of public investment.
Ownership and control
Ltds offer more control to owners, as shares are held by a select group, giving the owners more autonomy over decisions. PLCs, however, have a broader ownership base, with shares freely bought and sold on the stock market, which can dilute control but also bring in expertise through shareholders.
Regulatory Obligations
PLCs are subject to strict legal requirements, such as maintaining a minimum share capital, conducting Annual General Meetings (AGMs), and providing detailed public financial disclosures. Ltds, in contrast, face fewer regulatory hurdles and have more privacy regarding their financial affairs.
Public Image
Operating as a PLC can significantly boost a company’s public profile and market credibility, which can be advantageous for branding and recruitment. However, this visibility comes at the cost of increased public scrutiny and pressure to perform. Ltds, though lower-profile, offer greater flexibility and less public exposure.
Long-term Plans
Consider the future direction of your business. If you foresee needing large-scale capital in the future or wish to provide stock options to employees, a PLC may be the better long-term strategy. However, if maintaining private ownership and operational flexibility is your priority, an Ltd will better serve your goals.
Now that you have a clearer understanding of choosing the right business structure, you may need expert guidance to set up your company. Don’t worry! Khan Akber & Co. is a leading industry expert, ready to assist you in establishing your business in Bangladesh and ensuring a seamless market entry.
Summary
When deciding on the ideal business structure, entrepreneurs must weigh the differences between a Private Limited Company (Ltd) and a Public Limited Company (PLC). An Ltd offers ownership control with limited liability protection, typically held by a small group of shareholders, providing more privacy and flexible management but limited capital-raising capabilities. In contrast, a PLC allows shares to be traded publicly, offering greater access to capital, stricter regulations, and a more formal management structure. PLCs are subject to higher transparency and disclosure standards, and their shares are freely transferable, while Ltds enjoy more autonomy over decision-making. Key considerations when choosing between the two include capital needs, ownership control, regulatory obligations, public image, and long-term business goals. For expert assistance in establishing your business in Bangladesh, look no further than Khan Akber & Co., your trusted partner for a seamless market entry experience.
Frequently Asked Questions (FAQs)
What is the key difference between a Private Limited Company and a Public Limited Company?
A private limited company is privately owned and can not offer shares to the public, whereas a public limited company can sell shares to the public on stock exchanges, allowing for broader ownership and greater capital-raising opportunities.
Which company structure offers more privacy?
A private limited company offers more privacy, as disclosing financial information to the public is not required. A public limited company must adhere to strict transparency standards, making its financial information more accessible.
Can the ownership of a public limited company change more easily than an Ltd?
Yes, shares in a public limited company are publicly traded, meaning ownership can change frequently as investors buy and sell shares on the stock market. In an Ltd, shares are closely held and harder to transfer.
Are regulatory requirements stricter for public limited companies?
Yes, public limited companies face more strict legal and reporting requirements, including holding Annual General Meetings (AGM), producing detailed financial reports, and complying with securities regulations. Private limited companies have fewer obligations in these areas.
