Public companies play a vital role in economic development by raising capital from investors, creating employment opportunities, and supporting large-scale business expansion.
Many of the world’s largest organizations operate as public companies because this business structure allows them to obtain substantial financial resources while providing investors with an opportunity to own shares in the company.
A public company is a company whose shares may be offered to the general public in accordance with applicable laws and securities regulations. It operates as a separate legal entity, provides limited liability to its shareholders, and is subject to regulatory and corporate governance requirements.
Understanding the formation and characteristics of public companies helps students appreciate how large businesses are established, financed, and managed.
What is a Public Company
A public company is a company that has gone through the process of registering with the government to be able to trade its stock publicly. It is also known as a publicly-traded company or a publicly-held corporation.
Public companies offer their stocks for sale on major exchanges such as the New York Stock Exchange or NASDAQ and are often required to comply with various regulations and reporting requirements from the Securities and Exchange Commission.
These companies are usually large, well-established companies with hundreds of millions or even billions of dollars in annual revenue. Investors buy shares of public companies in the hope of gaining a return on their investment by making money when the stock price goes up.
Some examples of public companies include Amazon, Microsoft, Apple, and Coca-Cola.
See Also: What is Business Organization | Importance | Scope of Business Organization
Why Do Businesses Become Public Companies?
Businesses become public companies to raise substantial capital for expansion, increase their market reputation, and support long-term growth. Selling shares to the public enables companies to finance new projects, invest in technology, enter international markets, and strengthen their competitive position.
Becoming a public company also improves business visibility and provides shareholders with opportunities to buy and sell shares through regulated securities markets. However, public companies must comply with additional legal, financial reporting, and corporate governance requirements.
Example of a Public Company
A successful manufacturing company decides to expand internationally but requires significant additional funding. Instead of relying solely on bank loans, the company completes the legal process to become a public company and offers shares to investors through a stock exchange, subject to regulatory approval. The capital raised enables the company to build new production facilities, invest in research and development, and expand into new markets.
Characteristics of a Public Company
| Characteristic | Description |
|---|---|
| Separate Legal Entity | The company exists independently of its shareholders |
| Limited Liability | Shareholders’ liability is generally limited to their investment |
| Public Ownership | Shares may be offered to the public, subject to applicable law |
| Perpetual Succession | The company continues despite changes in ownership |
| Professional Management | Managed by a board of directors and executive officers |
Formation of Public Company (Stages)
Here are four stages of formation for a public Company;
- Promotion Stage
- Incorporation
- Capital Subscription
- Commencement of Business
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Promotion Stage
The promotion stage is the first stage of forming a public company. During this stage, the company must register with the securities exchange where it will list its stocks and provide its documents to the SEC. It should also announce that its shares are ready for sale to the public.
See Also: Limited and Unlimited Partnership
The company must then develop a marketing plan to promote its shares. This includes hiring a financial advisor, preparing the prospectus for potential investors, and setting the initial public offering (IPO) price.
The company must also decide whether to use a traditional or digital marketing strategy.
Once the company is ready to go public, it must seek out potential investors. This can be done through advertising campaigns, road shows, and private placement offers. The company must also actively respond to investor inquiries.
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Lastly, the company must register its securities with the SEC. This is a complex process that requires a great deal of paperwork and disclosure of information about the company’s finances, operations, and management.
Once this process is completed, the company can officially list its shares and begin trading on the stock exchange.
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Incorporation
The next step in forming a public company is the incorporation process. This is the legal process of creating the company’s legal structure and registering it with the state.
The process typically involves filing documents such as the Articles of Incorporation and Business Plan with the Secretary of State’s office in the state where the business will be based.
The documents outline the company’s purpose, ownership, and financial structure.
The registration process also includes obtaining federal and state tax identification numbers and permits or licenses that may be required by the state or local government.
It is important to note that the laws governing public companies vary from state to state, so the steps may vary depending on where the company is incorporated.
Once the incorporation documents have been filed, the company has a legal existence. At this point, the company can hire employees, buy or lease property, open bank accounts, and conduct business activities.
The company can now start issuing shares of stock to investors and raise capital to fund its operations.
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Capital Subscription
The 3rd stage in forming a public company is Capital Subscription. This involves issuing shares of the company to the public, as well as offering shares for sale through stock markets.
In some cases, existing shareholders may also be able to buy additional shares of the company.
When a company decides to offer its shares to the public, it must issue a prospectus and have it approved by the regulatory authorities.
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This prospectus must include details about the company, its financial position, and how the funds raised through the share sale will be used.
Prospectus approval is a necessary step before any company can list itself on a stock exchange.
Once all the paperwork is in order, the company can start marketing and selling its shares to the public. It can do this either directly or through an investment bank or brokerage firm.
Before investing in a public company’s shares, investors should carefully consider the company’s prospectus and other publicly available information.
Finally, once all the shares are sold, the company has become a public entity and its shares are now traded on a stock exchange.
At this point, the company has reached the end of the formation process and is ready to begin operating as a public company.
See Also: Transfer of Property | Transfer of Title of Goods
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Commencement of Business
Once the company is registered and all of its documents are submitted, the company must then obtain the required permits, licenses, and registrations that it needs to legally begin doing business.
This includes permits for activities such as manufacturing, selling, and importing goods, as well as registering with the relevant government agencies and taxes.
The company must also decide on its organizational structure, such as appointing directors and setting up accounting systems.
It should also prepare the necessary financial documents, such as the balance sheet and income statement, which will be used to track profits and losses.
Once all of these requirements are met, the company can officially commence its business activities.
This is done by issuing a certificate of commencement from the registrar of companies which is proof that the company has started trading.
At this stage, the public company is finally ready to start operating and trading on the stock exchange.
See Also: What is a Joint Stock Company | Features | Advantages & Disadvantages
It is now responsible for providing annual financial statements and submitting them to regulatory authorities, as well as informing the public about any changes or updates to its operations.
Public Company vs Private Limited Company
| Public Company | Private Limited Company |
|---|---|
| May offer shares to the public | Shares are privately held |
| Usually has a larger shareholder base | Usually has fewer shareholders |
| Greater regulatory and disclosure requirements | Generally fewer compliance requirements |
| Easier access to capital markets | More limited fundraising options |
| Shares may be traded on a stock exchange where listed | Shares are generally not publicly traded |
Frequently Asked Questions (FAQs)
What is a public company?
A public company is a company that may offer its shares to the general public in accordance with applicable company and securities laws.
Why do companies become public?
Companies become public to raise capital, support business expansion, increase their market visibility, and provide liquidity for shareholders.
What are the main characteristics of a public company?
The main characteristics include separate legal identity, limited liability, public share ownership, perpetual succession, and professional management.
What is the difference between a public company and a private company?
A public company may offer shares to the public and is generally subject to greater regulatory requirements, whereas a private company restricts public ownership of its shares.
Can all companies become public companies?
No. Companies must satisfy the legal and regulatory requirements established by the applicable company law and securities authorities before becoming public.
Conclusion
Public companies play an essential role in modern economies by providing businesses with access to substantial investment capital while offering investors opportunities to participate in corporate ownership.
Their separate legal identity, limited liability, and ability to raise funds through public share offerings make them an important business structure for large and growing enterprises.
As capital markets continue to evolve through digital technologies and stronger corporate governance practices, public companies have become more transparent, accountable, and accessible to investors.
Understanding the formation, characteristics, and legal responsibilities of public companies helps students and entrepreneurs appreciate their significance in today’s business environment.
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