Analyse the strengths and weaknesses of a ‘public limited company’ legal structure for business.
CAMBRIDGE
A level and AS level
Year Examined
February/March 2017
Topic
Business Structures
👑Complete Model Essay
Public Limited Companies: A Balancing Act of Strengths and Weaknesses
A public limited company (plc) stands as a powerful force in the business world, wielding the ability to raise vast sums of capital and achieve significant scale. However, this structure is not without its drawbacks, often demanding intricate regulations and exposing the company to market forces and public scrutiny. This essay will delve into the multifaceted nature of public limited companies, critically analyzing their strengths and weaknesses.
Strengths: Capital, Growth, and Prestige
Access to Capital Markets: Fueling Expansion
One of the most significant advantages of a plc lies in its ability to raise substantial capital through the issuance of shares on a stock exchange. Unlike private limited companies, there is no limit on the number of shareholders or the amount of capital that can be raised. This access to capital markets provides plcs with the financial muscle to pursue ambitious growth strategies, invest in research and development, or acquire other companies. For instance, the initial public offering (IPO) of tech giant Alibaba in 2014, one of the largest IPOs in history, raised over $25 billion, showcasing the immense capital-raising potential of the plc structure.
Limited Liability: Protecting Shareholders
A cornerstone of the plc structure is the concept of limited liability. Shareholders are only liable for the amount they have invested in the company's shares. This safeguard protects their personal assets from business debts and liabilities, fostering investor confidence and encouraging participation in the stock market. This legal separation between the company and its owners is crucial for attracting a diverse shareholder base, including small investors who may be hesitant to risk their personal wealth.
Liquidity and Prestige: Enhancing Market Value
The shares of a plc are easily transferable on the stock exchange, providing liquidity to shareholders who can buy and sell their holdings readily. This liquidity is attractive to investors as it offers flexibility and reduces their investment risk. Moreover, becoming a plc often enhances a company's prestige and reputation. It signals a certain level of size, stability, and transparency that can attract customers, business partners, and potential employees.
Weaknesses: Scrutiny, Control, and Market Volatility
Regulatory Burden: Navigating Complexities
The formation and operation of a plc involve stringent legal and regulatory requirements. These can be complex, time-consuming, and costly, often requiring specialized legal and financial expertise. Plcs are subject to extensive disclosure requirements, including publishing detailed financial statements and annual reports. While these measures aim to protect shareholders and ensure transparency, they also increase the administrative burden and can stifle entrepreneurial agility.
Loss of Control: Balancing Ownership and Management
The separation of ownership and management in a plc can lead to potential conflicts of interest. The original owners may find their control diluted as they sell shares to the public. This diffusion of ownership can create a situation where managers, not necessarily aligned with the long-term interests of the founders, make key decisions. The risk of hostile takeovers also looms large, where an outside entity can acquire enough shares to gain control of the company, potentially jeopardizing the original vision and strategy.
Short-Term Market Pressures: A Double-Edged Sword
Plcs are constantly under the scrutiny of financial markets, with their share price fluctuating based on investor sentiment and market conditions. While this can provide valuable feedback, it can also lead to short-termism, where management may prioritize immediate profits over long-term sustainability to appease shareholders and maintain a healthy share price. This pressure to perform can stifle innovation and discourage companies from taking risks essential for long-term growth.
Conclusion
The public limited company structure presents a compelling paradox. It offers unparalleled access to capital, limited liability for shareholders, and enhanced market visibility. However, these advantages come at the cost of increased regulatory scrutiny, potential loss of control, and vulnerability to market volatility. Ultimately, the decision of whether to become a plc is a strategic one, requiring careful consideration of the company's goals, risk tolerance, and the trade-offs inherent in this powerful but demanding legal structure.
Analyse the strengths and weaknesses of a ‘public limited company’ legal structure for business.
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Writing an A-Level Business Studies Essay: Analysing Public Limited Companies
This guide will help you write a strong essay analysing the strengths and weaknesses of a public limited company (PLC) legal structure for a business. You will learn how to structure your essay, develop convincing arguments, and use relevant examples to support your points.
1. Understanding the Essay Question
The essay question asks you to analyse the strengths and weaknesses of a PLC legal structure. This means you need to do more than just list the advantages and disadvantages. You need to:
- Explain the key features of a PLC, focusing on its legal structure and how it differs from other forms of business.
- Identify both the advantages and disadvantages of a PLC.
- Analyse the significance and implications of each strength and weakness, considering their potential impact on the business.
- Provide evidence and examples to support your claims, drawing on real-world businesses and business scenarios.
2. Structure Your Essay
A clear structure will make your essay easier to read and understand. Here's a possible structure:
Introduction:- Define a public limited company (PLC) and its key features.
- Briefly outline the advantages and disadvantages you will discuss.
- State your thesis statement: a clear and concise answer to the essay question.
- Strengths: Discuss each strength in detail. Provide relevant examples of how these strengths have benefited businesses.
- Separate legal identity: Explains how it protects owners from personal liability and facilitates business growth.
- Limited liability: Emphasize the reduced risk for shareholders and its impact on attracting investment.
- Ability to raise large sums of capital: Explain the mechanisms for accessing capital (e.g., IPOs, share offerings) and its implications for expansion and innovation.
- Freely transferable shares: Discuss the advantages for shareholders (liquidity, diversification) and the company (access to a wider investor base).
- Prestige and status: Explain how PLC status can attract customers, talent, and investors.
- Increased opportunity for acquisitions: Emphasize how the ability to offer shares can facilitate mergers and acquisitions.
- Easier access to bank loans: Explain the advantages of lower interest rates and favourable loan terms.
- Tax advantages: Discuss specific tax benefits associated with Plc structure (e.g., corporation tax rates).
- Weaknesses: Discuss each weakness in detail. Provide relevant examples of how these weaknesses have posed challenges for businesses.
- Complex legal formalities: Explain the costs and time involved in setting up a PLC, and its impact on smaller businesses.
- Strict controls and regulations: Explain the impact on company operations and decision-making, such as reporting requirements.
- Requirement to file accounts: Discuss the burden of transparency and its impact on competitive advantage.
- Loss of control for original owners: Explain the dilution of ownership and the potential for conflicts of interest.
- Risk of takeover: Discuss the vulnerability of PLCs to hostile takeovers and the potential consequences for stakeholders.
- Share value determined by the market: Explain the impact of market fluctuations on company performance and the potential for short-term pressures.
- Greater public scrutiny: Discuss the increased media attention and potential for reputational damage.
- Governance and management problems: Explain the potential for conflicts of interest and the challenges of managing large and complex organizations.
- Reiterate your thesis statement, summarizing your analysis of the strengths and weaknesses of a PLC legal structure for a business.
- Offer a balanced conclusion, acknowledging both the advantages and disadvantages of this legal structure.
- Consider the implications of your analysis for businesses considering adopting or maintaining a PLC structure.
3. Tips for Writing a Strong Essay
- Use clear and concise language: Avoid jargon or overly technical language.
- Support your arguments with evidence: Use real-world examples, statistics, and case studies to add weight to your claims.
- Present both sides of the argument: Don't just focus on the strengths or weaknesses; consider how they interact and balance each other out.
- Be critical and analytical: Go beyond simply listing the advantages and disadvantages. Explore the implications of each point and analyze its potential impact on the business.
- Proofread carefully: Check for grammar, spelling, and punctuation errors.
4. Examples
When discussing the strengths and weaknesses of a PLC, you can use examples like:
- Strengths:
- Ability to raise large sums of capital: Example of a company like Tesla using an IPO to fund its expansion and innovation.
- Prestige and status: Example of a small company going public to gain credibility and attract investors.
- Increased opportunity for acquisitions: Example of a company like Google using shares to acquire other companies like YouTube.
- Weaknesses:
- Complex legal formalities: Example of a small business facing high costs and delays in setting up as a PLC.
- Risk of takeover: Example of a company like Cadbury facing a hostile takeover by Kraft.
- Governance and management problems: Example of a company like Enron facing a major accounting scandal due to poor governance.
Remember to choose examples that are relevant to the points you are making and that demonstrate a clear understanding of the subject matter.
5. Conclusion
By following these guidelines, you can write a well-structured and insightful essay that demonstrates a thorough understanding of the strengths and weaknesses of a public limited company legal structure for a business.
Extracts from Mark Schemes
Analyse the strengths and weaknesses of a ‘public limited company’ legal structure for business.
Answers may well initially Explain a public limited company – a company that can sell shares to the general public on a stock exchange and has limited liability.
Identified and analysed advantages and disadvantages of this form of business organisation could include the following:
Strengths:
- business has a separate legal identity
- limited liability for shareholders
- ability to raise large sums of capital - no limitation on number of shares
- shares are freely transferable - providing liquidity for shareholders
- provides prestige and status
- increased opportunity to make acquisitions by offering shares
- may find it easier and cheaper to borrow form banks
- tax advantages vis a vis other organisation structures.
Weaknesses:
- complex legal formalities to form a public limited company - costly and time consuming
- strict controls and regulations to protect the interests of the ordinary shareholder
- requirement to file accounts
- the original owners may lose control
- risk of takeover
- financial markets will determine the value of the company through the trading of the shares
- greater public scrutiny of company performance and activities
- may lead to governance/management problems.