Disadvantages Of Public Corporations: Everything You Need to Know
The disadvantages of public corporations vary from complex legal requirements to market fluctuations. 3 min read
Disadvantages of Public Corporations
The disadvantages of public corporations vary from complex legal requirements to market fluctuations. Public corporations are business entities that offer their stock to the public on public markets. For example, Amazon, Inc. is a public corporation that anyone can buy shares of. Public corporations are distinct entities that can conduct business, and sue and be sued, in the name of the public corporation, not its individual shareholders.
Many public corporations begin as private corporations with only a few shareholders. They then convert into public corporations, offering their shares to the public to raise more funding or increase awareness of their company. Because of the disadvantages of public corporations, only large enterprises are usually well suited to “go public.”
Disadvantages of Public Corporations
The goal of many new corporations is to become a public corporation with more funding and publicity. However, converting to a public corporation is not the right decision for every business. There are some serious disadvantages of public corporations.
- Complex Legal Requirements: Setting up and maintaining a public corporation is much more difficult than setting up and maintaining a private corporation. Public corporations are subject to many legal requirements that do not apply to private corporations. For example, there are rules that govern how shares are allotted.
- Increased Governmental Oversight: Public corporations are subject to a high level of government oversight that does not apply to privately held corporations. The level of oversight has increased over the last 10 years in the wake of the many public corporation scandals that caused harm to millions of people. The government regulations, though often necessary, slow down and decrease the flexibility of the operations of public corporations.
- Many Company Records are Public: To protect the public and consumers, many of the records of public corporations are required to be open to the public. This means that the public, as well as competitors, may have access to information that company would prefer to keep secret.
- Market Fluctuations: One of the biggest disadvantages of public corporations is that they are subject to the whims of the market. Shares of publicly traded companies are bought and sold on a daily basis, and the public corporation cannot control the share prices. As anyone who has ever traded shares knows, the market is not always reasonable.
- Dishonest Investors: Day trading shares of public corporations opens up opportunity for dishonest investors to utilize the market for their own gain to the detriment of the public corporation.
- Minority Shareholders Lack Protection: Shareholders of public corporations are so numerous that there is very little, if any, protection of the rights of minority shareholders.
- Ownership & Management is Split: The ownership and management of public corporations is split. The owners of public corporations are its shareholders who often have no contact with management. Their only significant power is the ability to vote at annual meetings. Managers of public corporations are often outside individuals who receive a salary. These paid managers often lack the incentive to work hard for the company that exists in private corporations where the owners and managers are often the same people.
Advantages of Public Corporations
Of course, public corporations are not all bad news. There are some advantages of public corporations too.
- Flexibility & Independence Retained: Public corporations, like private corporations and unlike government agencies, have a lot of control and flexibility regarding company decisions and how the company operates.
- Governmental Review Promotes Public Interest: Public corporations are subject to more governmental review and regulation than privately held corporations. This oversight helps ensure that public corporations are operating in the best interests of the public as a whole.
- Economies of Scale: Public corporations tend to be large scale operations that benefit from economies of scale. For example, they discount pricing on products because they can buy in bulk. These economies of scale are often passed on to the public in the form of lower prices and improved service quality.
- Recruitment Power: Public corporations are usually larger and have more funding than private corporations. They can use this financial power to their advantage by offering better salaries and benefits to potential employees and company managers. This helps public corporations recruit top talent.
- Debt Shared by More Investors: Adverse financial circumstances, like debt, are spread across many investors in a public company, so the impact of debt and other company financial hardships on any single investor is much lower than with a private company.
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