Key Takeaways

  • Public corporations face stricter legal requirements, regulatory burdens, and increased transparency that can limit agility and competitiveness.
  • Market volatility, short-term investor pressure, and exposure to hostile takeovers present substantial risks.
  • Administrative costs for compliance and reporting can be prohibitively high.
  • Decision-making may slow due to complex governance structures and dispersed shareholder interests.
  • Despite these challenges, public corporations benefit from greater capital access, recruitment leverage, and economies of scale.

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. 

High Compliance and Reporting Costs

Public corporations must comply with numerous federal and state laws, including those enforced by the Securities and Exchange Commission (SEC). This involves extensive financial disclosures, regular filings like Form 10-K and Form 10-Q, and third-party audits. These compliance requirements significantly increase administrative costs. Smaller companies may find the expense of legal counsel, accounting services, and investor relations teams burdensome, making public status unsustainable without robust revenue streams.

Vulnerability to Hostile Takeovers

One of the more strategic disadvantages of public corporations is the risk of hostile takeovers. Since shares are publicly traded, any investor or competitor with sufficient capital can accumulate a controlling interest in the company, potentially disrupting leadership and strategy. This risk often leads to defensive practices like poison pills or staggered boards, which add governance complexity.

Short-Term Market Pressures

Public corporations often face pressure from analysts and institutional investors to show strong quarterly performance. This focus on short-term earnings can divert management's attention from long-term goals like innovation, R&D, or sustainable growth. Strategic planning may suffer when executives prioritize short-term metrics to maintain stock price stability or satisfy shareholder expectations.

Dilution of Founder Control

When a company goes public, its founders and early investors usually give up significant control to shareholders. Even though the founders may retain a seat on the board, decisions must align with the interests of a broader base of investors. This can hinder the original vision for the company and create conflicts between the leadership’s strategic goals and the shareholders’ financial expectations.

Slower Decision-Making Process

Governance in public corporations typically involves multiple layers, including a board of directors, shareholders, and regulatory bodies. While this structure promotes checks and balances, it can significantly slow down the decision-making process. Actions like mergers, acquisitions, or internal restructuring often require board approval and may be further delayed by shareholder votes or regulatory reviews.

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.

Frequently Asked Questions

  1. What are the disadvantages of a public corporation compared to a private company?
    Public corporations face greater regulatory scrutiny, higher administrative costs, and market-driven pressures that private companies often avoid.
  2. How do market fluctuations affect public corporations?
    Market fluctuations can rapidly decrease a company's valuation, influence investor sentiment, and pressure management to make short-sighted decisions.
  3. Why are public corporations more vulnerable to takeovers?
    Their shares are openly traded, allowing external entities to buy large stakes and attempt to gain control without internal approval.
  4. Can public corporations protect minority shareholders effectively?
    Not always. While protections exist, the sheer number of shareholders can dilute voting power and reduce the influence of minority interests.
  5. How do public corporations handle strategic decisions under investor pressure?
    Executives must balance long-term vision with shareholder demands, often leading to compromises that favor short-term financial performance.

If you have more questions about public corporations or need help forming a corporation, you can post your legal need on UpCounsel’s marketplace. Upcounsel is a marketplace for top attorneys with an average of 14 years of experience. Attorneys on Upcounsel have experience working with, or on behalf of corporations like Google, Menlo Ventures, and Airbnb.