27. Forms of business: PLCs

Question 1

Advantages of Public Limited Companies

Answer 1

• Huge amount of money can be raised from the sale of shares to the public.
• Production costs may be lower as firms may gain economies of scale
• Because of their size, public limited companies can often dominate the market.
• It becomes easier to raise finance, as financial institutions are more willing to lend to public limited companies. A plc with substantial assets can provide the guarantees needed by financial institutions to receive secured loans.
• Pressures from the media and financial analysts as well as the danger that the public limited company might be taken over by another company, encourages executives and managers to perform well and make profits.

Question 2

Disadvantages of Public Limited Companies

Answer 2

• The setting-up costs for public limited companies can be very expensive
• As anyone can buy their shares, it is possible for an ‘outsider’ to have power over company if they buy enough share
• members of the public can inspect all of the company’s accounts. Competitors may be able to use some of this information to their advantage. Public limited companies have to publish more information than private limited companies.
• Because of their size it is more difficult to deal with customers at a personal level
• The way they operate is controlled by various company acts, which aim to protect shareholders.
• There may be a divorce of ownership and control. This means that the shareholders may not be able to exert enough pressure on those that end up running the company, such as senior managers.
• Some very large public limited companies are inflexible due to their size

Question 3

Barriers to entry

Answer 3

Obstacles that make it difficult for new firms to enter a market

Question 4

Private equity company

Answer 4

A business usually owned by private individuals backed by financial institutions

Question 5

Public limited company

Answer 5

A company owned by shareholders where the shares can be traded openly on the stock market

Question 6

Stock market

Answer 6

A market for second-hand shares

Question 7

Stock market flotation or initial public offering (IPO)

Answer 7

The process of a company ‘going public’ - making shares available to the public for the first time