Advantages and Disadvantages of Public Corporation: Everything You Need to Know
The advantages and disadvantages of public corporation are important to know when wanting to convert your private business to a public corporation. A public corporation is one that will “go public” by offering its stock to the public in the open market.3 min read
2. Disadvantages of a Public Corporation
The advantages and disadvantages of public corporation are important to know when wanting to convert your private business to a public corporation. A public corporation is one that will “go public” by offering its stock to the public in the open market.
Public corporations are also referred to as state-owned enterprises and nationalized industries. Such corporations are owned by the government, as the business must register securities in the stock market before selling to the public. The chairman and board of managers in a public corporation are appointed by the government. Such individuals are in charge of the daily operations of the business. Notably, public corporations have no shareholders.
When a private business chooses to convert to a public corporation, the funds come from the government in the form of government-approved loans. The funds also come from the private sector. The goal of the public corporation isn’t to make a profit but rather to have more of a non-profit purpose to serve the needs of the public.
Keep in mind that public corporations are a separate and distinct legal entity. For that reason, it can sue another party or be sued in court.
Advantages of a Public Corporation
Some of the many advantages of a public corporation include the following:
- Economies of scale
- Easier planning and coordination
- Autonomous set-up
- Protection of public interest
- Quicker decisions
- Raising funds through private sourcing
Since public corporations are generallylarge, they can benefit from economies of scale, including cheaper pricing and better quality of service. And because public corporations are wholly owned by the government, planning and coordination is easier since the government can take complete control over certain items.
Public corporations have an autonomous set-up, meaning there is great flexibility in terms of a public corporation’s operations.
Public corporations can also create policies and procedures to promote public welfare.
Decisions in a public corporation can be made rather quickly since bureaucracy is reduced.
These types of businesses can also raise funds by issuing bonds. This is where private funding comes in; public corporations are not required to obtain funds only from government resources.
Disadvantages of a Public Corporation
Some of the disadvantages of operating a public corporation include:
- Difficult to manage
- Risk of producing inefficient products
- Financial burden
- Political interference
- Misuse of power
- Consumer interests ignored
- Expensive to maintain and operate
- Anti-social activities, i.e., charging too much for a product
A public corporation could be difficult to manage, as several meetings might be required with several government officials. Therefore, while decisions can be made quickly, the decision-making processing can also become quite slow if several staff members need to be present for meetings during strict time schedules.
Such businesses could also end up producing low quality and overpriced products, particularly because they can’t go bankrupt, and there isn’t enough competition to fully understand the price point and quality.
If a public corporation suffers a financial loss, the government will provide subsidies to cover such loss. The more loss that the business incurs, the more money the government will need to spend, which can cause a strain on government resources.
While the public corporation has an autonomous set-up, which is generally seen as favorable, many think of this as a disadvantage due to the political interference since governments own such businesses. While the public corporation has immunity, this could cause some government officials to misuse their power and engage in corruption.
A lot of these businesses operate as monopolies. Since there isn’t much competition, these businesses could function improperly since they might have less focus on improving the products being offered; furthermore, customer service might not be a top priority.
Public corporations are expensive to maintain and operate. They also might engage in anti-social activities, such as charging too much money for goods or providing goods that aren’t sufficient for consumers.
Keep in mind that public corporations are only beneficial for very big state businesses and not for small businesses. Therefore, before deciding if you want to operate a public corporation, you should keep in mind the aforementioned advantages and disadvantages.
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