Public Corporation Advantages and Disadvantages: Everything to Know
Considering public corporation advantages and disadvantages should help you decide whether or not you should make your corporation public.3 min read
2. Advantages of Public Corporations
3. Disadvantages of Public Corporations
Considering public corporation advantages and disadvantages should help you decide whether or not you should make your corporation public.
An Introduction to Public Corporations
The main difference between private and public corporations is that private corporations are funded by their owners and public corporations sell securities such as bonds and stocks to the general public.
The departments of public corporations are also managed differently than private corporations, which is why public corporations are their own distinct legal entity. If you convert your private corporation to a public corporation, the owners of your business will have a variety of advantages. However, there are also disadvantages to this process.
Funds for a public corporation come from:
- The government.
- Private sector loans.
- Government-approved loans.
A Government-approved loan creates a public corporation. This Act defines:
- The scope of corporate activities.
- Powers of the corporation.
- Immunities and privileges of corporation members.
The purpose of public corporations is working towards the public interest, which is why these corporations do not seek to earn a profit. Typically, a publicly held corporation will start as a private corporation. Public corporations do not have shareholders.
The Securities Exchange Act of 1934 regulates publicly held companies. This Act requires these corporations to report company revenue to stockholders on a regular basis. Private corporations have no responsibility to inform stockholders of revenue. Publicly held companies must register their shares with the Securities and Exchange Commission (SEC) before they can be sold to the public.
Advantages of Public Corporations
With a public corporation, every decision will be made after considering the benefits and full costs. Public corporations can be used to impact a country's economic activity. For instance, the government may encourage a public corporation to boost their output in order to increase the overall output of the country.
Using public corporations in this way can benefit the general public by:
- Improving quality of service.
- Lowering prices.
- Stabilizing prices.
In an industry where having only one firm makes the most sense, a public corporation won't abuse its power, which can be a concern with private corporations. When a government owns an entire industry, it simplifies coordination and planning. For example, if the government operates a country's train system, it can coordinate timetables to make sure that the trains run on time. For essential industries such as transportation and electricity, it is important that prices remain low and quality remains high, which is why many industries rely on public corporations.
Public corporations are set up autonomously, which allows them independent and flexible operations.
Disadvantages of Public Corporations
The most noteworthy disadvantage of public corporations is that these organizations are extremely difficult to manage. Because public corporations are so large, the process of making decisions can be very slow as it takes longer to hold meetings and communicate with staff.
When a company goes public, the company must now take into account the wishes of a larger number of people, many of which do not hold company interests.
Inefficiency and Poor Quality
Inefficiency is also a potential disadvantage of a public corporation. Because public corporations know that they have little to no competition, are acting as a monopoly, and are unable to go bankrupt, they may offer low quality products for expensive prices.
Restrictive Access to Revenue
If a public corporation is losing instead of making money, they may need to be subsidized. When tax revenue is needed to support a failing corporation, it means this revenue cannot be used for other vital purposes such as training.
The losses of public corporations are often subsidized by the government, and if this occurs regularly, it can take a huge toll on government finances. This can be particularly disastrous for developing nation.
Lack of Flexibility and Independence
Although public corporations are thought to be able to function autonomously, the reality is very different. In essence, the flexibility and autonomy of public corporations can be only on paper, as the state has a large influence on these corporations. Similarly, while public corporations are supposedly financially independent, the government will decide policies and principles by which the company must abide. Public corporations must deal with almost constant political interference and may need to satisfy the wishes of politicians.
Potential for Corruption
Because the day-to-day operations of public corporations are not subject to parliamentary inquiry, corruption and abuse of power is possible. Investigating corruption can take a great deal of time, and may result in the loss of important corporate resources.
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