When you hear the terms “stockbroker,” “stock exchange,” and “board of directors,” do you know what kind of companies are involved?
Public limited companies, like private limited liability partnerships (LLP), are separate legal entities, thereby protecting individual shareholders from financial responsibility for the company apart from their original investments. Shareholders, also known as members, cannot be sued for financial or legal damages because each individual owns only a small portion of the company. In order to qualify as a Publicly Limited Company, there must be at least seven shareholders. There is no maximum. Many businesses start out as private limited or private limited liability companies, and only open up to public trading once the company has grown in terms of profit, personnel, and profile.
These are the types of companies whose shares are traded in the stock market. Indeed, a broker may purchase and sell shares of public companies on his client’s behalf so quickly the client doesn’t have a chance to participate in company decisions, i.e. electing a board of directors. Due to the nature of this kind of trading, it is crucial that accurate company information be made available to the public through annual financial statements. Additionally, ownership of shares transfers to the shareholder’s next of kin upon his/her death.
You may have heard of government bonds, but did you know that private companies offer similar schemes? In addition to selling shares on the stock exchange, public limited companies are able to raise capital by issuing bonds and debentures, which are similar to bonds but tend to be shorter term. Rather than purchasing shares of a PLC, an individual may purchase a debenture or bond from a company in exchange for a loan. Over a specified period of time, the company pays the investor interest on this loan, and returns the principle (original loan amount) once the maturation period is over. A debenture is similar, although its maturation period is shorter and usually based on a specific project within the company. Although they do not yield much profit for investors, bonds and debentures are extremely safe and attractive. Only public companies are allowed to offer these types of investments.
Since PLCs tend to be larger companies with more capital, higher employment and more complex accounting, they require a regulated form of governance. Important decisions must be approved by PLC’s board of directors, comprised of the company’s directors as well as two to twelve elected shareholders. In the event that a director resigns, is removed, or passes away, the rest of the board elects a new director.
It is more common to take a private company public than it is to start a PLC from scratch. At least two shares, worth at least £50,000, must be sold before Companies House will issue your company a Certificate of Trade. There must also be at least two directors and a Qualified Company Secretary. Once you have established your Public Limited Company, you will also have shorter filing periods for accounts at the end of each financial year, thereby necessitating a staff of accountants and tax professionals. All of this results in a more administrative duties than smaller, private companies have to handle.