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Advantages / Disadvantages of Doing Business as a Public Corporation

What are the advantages and disadvantages of doing business as a public corporation? what are the pros and cons of taking a company public? Well, i suggest you read on to find out.

Of what use is this article when I have no intention of taking a company public? This might be the thought running through your mind as you glance through the headline. Well, I don’t know if taking a company public interests you but I do know that it is the dream of every successful entrepreneur to see his/her company quoted on the stock exchange.

“If you are acquired, a company validates you. If you go public, the market, the world validates you.” – Fortune Magazine

Sometime in the future, I think I am going to do a piece on how to build a successful business from scratch and take it public via an IPO. I bet it’s going to be an interesting and engaging subject. In the mean time, I want you to take a look at most of the successful entrepreneurs; take a look at the drop out billionaires of this world and you notice that 90% of these entrepreneurs have their companies listed on the stock market.

Now why do these entrepreneurs go public? What do I stand to gain from taking a company public? What are the advantages and disadvantages of doing business as a public corporation? If you desire answer to any of these questions, please read on. In this article, I am going to explain in detail everything you need to know about taking a company public. I am going to highlight the advantages and disadvantages of doing business as a public corporation. If you are still willing to learn, then let’s get the ball rolling.

3 Reasons Why Entrepreneurs Take a Company Public

Just as I said earlier, almost all successful entrepreneurs have one or more companies listed on the stock exchange; from Bill Gates, Anita Roddick, Warren Buffett, Larry Ellison to Steve Jobs, Sam Walton, Ingvar Kamprad and Aliko Dangote; the richest black man in the world. Now why did these men and women go public? You will find the answer below.

1. To Raise Money for Growth and Expansion

“I think you might see us growing much deeper into banking. You might see us acquiring companies in the banking area. You might see us acquiring companies in the retail area. I think you might see us acquiring companies in the telecommunications. I think you will see us getting stronger in business intelligence.” – Larry Ellison

This is probably the fundamental reason why successful entrepreneurs take a company public. If a business has grown and attained a profitable status, the business owner may take the company public to raise money for expansion into other potential markets. Take a look at how Larry Ellison strategically expanded Oracle Corporation by means of acquisition; buying up 57 companies within five years and you will understand the power attached to going public.

“In order to grow at this pace, there’ll have to be a couple of acquisitions along the way. The tricky thing is to grow at this rate and maintain a 40 percent operating margin.” – Larry Ellison

2. As an Exit Strategy

“Always start at the end before you begin. Professional investors always have an exit strategy before they invest. Knowing your exit strategy is an important investment fundamental.” – Rich Dad

In the world of business and investing, your exit is more important than your entry. In the business plan of every smart entrepreneur, an exit strategy is always included because they know that whatsoever has a beginning surely has an end. As an entrepreneur, once your business goal is achieve, you should know it is time to move on to bigger challenges.

Once you have made it, you will understand that any business is limited in the challenges it offers. You will want and need other games to play, so you will look for other ventures to hold your interest.” – J. Paul Getty

Taking a company public is a smart exit strategy for successful entrepreneurs. Successful entrepreneurs know that once their goal is achieved in a business, it is time to move on. They know that the journey started years ago is almost complete and it is time to pass the baton. So what they do is take the company public and start a new business or retire. Taking a company public gives you the option to sell your business while still maintaining control over it after the sale.

“In order to be a player on the fast track, you will need to have a plan on how to gain more and more control. On the fast track, it is control more than money that counts.” – Rich Dad

3. To Relinquish Hold on the Company

An entrepreneur may go public to take the administrative role of the business off his neck while still maintaining passive control of the business. What I mean is this; if your business has grown big, you can go public to hands off from the day to day running of the business while still maintaining control. In essence, you have given up administrative role to assume the role of a watchdog.

Now that I have explained the reason why successful entrepreneurs take their company public; are you still interested in building a business to take public? If yes, then below are seven advantages of taking a company public.

7 Advantages of doing business as a public corporation

Though only about 3% of all businesses started usually go public, I felt compelled to write on the process of taking a company public because you might someday decide to take your company public. Below are seven advantages of taking a company public and doing business as a public corporation.

1. Access to unlimited funds

The first advantage of forming a public corporation is this; your company will have access to unlimited funds. This is because a public company has the ability to raise an unlimited amount of capital from small investors and big businesses.

We have to still develop the IKEA group. We need many billions of Swiss francs to take on China or Russia.” – Ingvar Kamprad

2. Being quoted on the stock exchange

By taking your company public, your company shares can now be traded on the floor of the stock exchange thereby giving both small and big investors access to your company.

3. Investor’s confidence

Investors are more comfortable investing in public companies than private companies due to the professionalism of the management in public corporations, the strict rules of the regulatory bodies and the publicly published financial statements.

4. Reduced risk

Public corporations have the right to sell shares to the public and the shareholders have limited liability. Therefore, the risk is spread over a large number of people.

5. Fast growth pace

Taking your company public will enable you grow and expand your business with ease. Since you have access to unlimited funds, expansion will be a piece of cake.

If GE’s strategy of investment in China is wrong, it represents a loss of a billion dollars, perhaps a couple of a billion dollars. If it’s right, it’s the future of this company for the next century.” – Jack Welch

“I think you might see us growing much deeper into banking. You might see us acquiring companies in the banking area. You might see us acquiring companies in the retail area. I think you might see us acquiring companies in the telecommunications. I think you will see us getting stronger in business intelligence.” – Larry Ellison

6. Public companies are known for delegation of managerial functions. When you go public, you will have enough working capital to employ the best in terms of experience, professionalism and skill.

“The competition to hire the best will increase in the years ahead. Companies that give extra flexibility to their employees will have the edge in this area.” – Bill Gates

7. Taking a company public is like selling your business without giving up control or ownership of the business. It is like giving the public a chance to buy into your business and share in the profits while still maintaining control.

In the world of business and investing, there are two sides to every deal; and professional investors and entrepreneurs know this. Whatever has a bright side equally has a corresponding dark side. Before deciding to take a company public; before deciding to do business as a public corporation; it is advisable you weigh the pros and cons. Since I have provided you with the advantages of doing business as a public corporation, I will also share with you the disadvantages of doing business as a public corporation. Below are seven disadvantages of taking a company public.

7 Disadvantages of Doing Business as a Public Corporation

1. The management structure in a public corporation is usually decentralized so therefore, the managers are in most cases not the business owners. Since they are managers, they may not be motivated towards the company’s goal and vision as the entrepreneur that created the business.

Management is doing things right, leadership is doing the right things.” – Peter F. Drucker

While the entrepreneur may be driven by the desire to fill a need and build a successful business, the managers or corporate leaders may be driven by bonuses, incentives, job titles, promotions and salary; not the entrepreneur’s vision.

2. Taking a company public is very expensive due to legal fees, meeting up with the demand of government agencies and regulatory bodies and also the cost of undertaking an IPO (Initial Public Offer) adds to the burden. The IPO cost may run into hundreds of millions of US dollars.

3. When you take your company public, you will have to serve three bodies. You will serve your customers, government agencies or regulatory bodies and the investors. This might be too cumbersome or stressful for some entrepreneurs to handle.

4. Public Corporations are subjected to more legal restrictions than other type of entities.

5. When you take a company public, your company becomes subjected to stiffer accounting rules and principles; thereby reducing your flexibility.

“Unfortunately, we are not a public company. We are a private group of companies and I can do what I want.” – Richard Branson

6. When you form a public corporation, your business affairs and financial statements can’t be kept secret any longer. It must be published to the public at large.

7. Public corporations are subjected to heavy corporate tax. They pay both federal and state tax. Public corporations are also subjected to double taxation. They are taxed based on their earnings and the shareholders are taxed based on their dividend. As an individual or small business owner, you can simply find a tax calculator online and prepare your own return, but as a public corporation, you will almost certainly want to retain the services of a certified tax professional.

“A corporation’s primary goal is to make money. Government’s primary role is to take a big chunk of that money and give to others.” – Larry Ellison

As a last note, I want you to also know that public corporations face severe penalties if they go wrong or misinform the public; so professionalism and transparency are the rules of the game. Look at what happen to Oracle Corporation when they overstated their earnings in the early 90’s. Consider the case of Martha Stewart, Arthur Anderson, WorldCom and Enron; you will come to understand the harsh penalties meted out to erring public corporations.

However, if you are daring, you may still decide to take your company public; the ball rests with you the entrepreneur. Don’t shy away from undertaking the entrepreneurial process of going public because of the challenges involved. Business challenges are part of the entrepreneurial process. Just as J. Paul Getty said:

“Without the element of uncertainty, the bringing off of even, the greatest business triumph would be dull, routine and eminently unsatisfying.” – J. Paul Getty


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