Key Takeaways

  • A corporation goes public by offering its stock to the public on recognized stock exchanges.
  • Public corporations are proportionally owned by the shareholders who buy stocks.
  • Funds for public corporations come from the stocks sold to investors.
  • Their large size allows for cheaper pricing and better service due to bulk purchasing and efficient processes.
  • They are under greater regulatory scrutiny and have associated compliance costs.
  • Weighing the advantages and disadvantages carefully will help you make an informed decision about converting to a public corporation.

Understanding the advantages and disadvantages of a public corporation before you convert your private business to a public corporation is important. This knowledge can ensure you make a decision that best serves your business's long-term goals and interests. 

What is a Public Corporation?

A corporation will “go public” by offering its stock to the public in the open market. This move follows an initial public offering (IPO) and regulatory approval. 

Public corporations are proportionally owned by shareholders who buy stocks in the corporation on recognized stock exchanges.  

When a private business chooses to convert to a public corporation, the funds come from the stocks in the company that investors buy. 

Public corporations are for-profit organizations that make money for shareholders. They are also a separate legal entity from shareholders. 

Advantages of a Public Corporation

Some of the many advantages of a public corporation include the following:

Economies of Scale

Since public corporations are generally large, they can benefit from economies of scale, including cheaper pricing and better quality of service.  

Their size helps them negotiate lower costs for bulk purchases and invest in efficient processes. This translates to overall cost savings and improved service offerings.

Access to Capital

Perhaps the most notable incentive to go public is the ability to sell stock and access much more capital.  

This capital has many uses, including expansion, research and development, taking on new risks, and paying off existing debt. 

Enhanced Visibility and Credibility

When a company goes public, it immediately becomes more visible. Thanks to the regulatory and compliance oversight to which publicly listed corporations are subject, it can also establish more credibility for the company.

Liquidity for Founders and Investors

Public corporations create liquidity opportunities for founders and shareholders. They can sell their shares on the stock exchange, providing a convenient and often profitable exit strategy.  

This liquidity enables founders and early investors to realize the value of their investments while offering them financial flexibility and the ability to diversify their portfolios.

Employee Incentives

Public corporations can incentivize their staff by offering them stock options and other equity-based incentives. This can motivate employees to perform better, helping the business to succeed and the stock to rise.  

These efforts can pay off by increasing their share of profits, which also benefits the company. 

Leverage for Acquisitions

Another significant advantage to public corporations is their ability to use stock to facilitate mergers and acquisitions and other growth opportunities.  

This strategic ability gives corporations more flexibility to expand their operations and enter other markets or services.

Which Characteristics of a Corporation Are a Disadvantage?

There can also be potential drawbacks to creating a public corporation, five of which are:

Regulatory and Compliance Burdens

While the public corporation's autonomous operations setup is generally seen as favorable, many consider it a disadvantage. 

Public corporations are subject to greater regulatory and compliance scrutiny (including from the SEC) than private companies. The costs of compliance and reporting to these and other regulatory bodies add up for public corporations. 

Loss of Control

Due to having to account for shareholders' influence, the decision-making process can become relatively slow and harder to control. This influence often means that shareholders must make decisions collaboratively, which can impede swift action and lead to inefficiencies.

Short-Term Pressure

Public corporations often face pressure to focus on quarterly results, impacting long-term strategic planning. The emphasis on short-term performance can divert attention from long-term goals, which might hinder growth and development.

Market Volatility

Public corporations are vulnerable to market volatility, which affects their stock price and overall valuation. 

External factors, including economic shifts, market trends, and investor sentiment, can influence the stock price, leaving the company susceptible to value fluctuations. 

Disclosure of Sensitive Information

A certain level of transparency is a regulatory requirement for public corporations. This includes disclosing highly sensitive information. While transparency is important for accountability, competitors can also use it to their advantage.  

Knowing the business must disclose highly detailed financial and operational information provides more leeway to competitors.  

They can use that information to learn about the corporation's strategies and performance, ultimately siphoning away a competitive advantage. 

You can learn more about the potential drawbacks of public corporations here: Disadvantages Of Public Corporations: Everything You Need To Know.

Comparing Small Businesses with Public Corporations

When we compare them to public corporations, small businesses face distinct challenges. 

These unique challenges include: 

  • Limited access to capital
  • Constrained resources for marketing and development
  • A smaller customer base

They also face significant risks from market fluctuations and competition from larger entities.

How Public Corporations Differ in Addressing These Challenges

Public corporations have certain advantages that help them overcome and avoid many of the challenges of small businesses.

Access to Capital

Public corporations can raise massive amounts of capital by selling stocks in the market. They use these funds to fuel capital expansion, research and development, and various strategic initiatives.  

Conversely, small businesses fund themselves with loans and raising private capital.

Funding for Marketing and Development

With more capital than small businesses, public corporations can afford to invest large budgets in markets and developing new technologies.  

They can use this funding for comprehensive marketing campaigns and to adopt cutting-edge technologies that give them a competitive edge in the marketplace.

Larger Customer Base

Public corporations have more opportunities to attract customers, partners, and staff than small businesses. This is mainly due to their increased access to capital, which allows them to market to a broader customer base, among other benefits.

Conclusion: Weighing the Pros and Cons of Public Corporations

The decision to structure a business as a public corporation is not to be made lightly. Carefully weighing the drawbacks and advantages of public corporations will help you make this decision confidently. 

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