Everything you need to know about the advantages and disadvantages of joint stock company. A Joint Stock Company is an incorporated association of two or more persons having a separate legal existence with perpetual existence and common seal.
Its capital is divided into shares which are freely transferable and the owners of these shares have limited liability. It is an artificial entity created by law.
A Joint Stock Company is capable of procuring unlimited capital by issuing share and debentures which can be bought both by the classes and the masses.
Due to qualities such as limited liability and stability of the enterprise, the Joint Stock Company attracts investors and good managerial talent towards the company. Thus, a Joint Stock Company is in a better position to meet the growing needs of modern business.
Some of the advantages or merits of joint stock company are:-
1. Larger Capital 2. Limited Liability 3. Stability of Existence 4. Economies of Scale 5. Scope for Expansion 6. Public Confidence 7. Transferability of Shares 8. Professional Management
9. Tax Benefits 10. Risk Diffused 11. Social Benefits 12. Greater Borrowing Capacity 13. Promotes Savings and Investment 14. Greater Accountability 15. Greater Adaptability 16. Synergy of Capital and Capability 17. Use of Latest Technology.
Some of the disadvantages or demerits of joint stock company are:-
1. Difficulty in Formation 2. Lack of Secrecy 3. Delay in Decision Making 4. Concentration of Economic Power 5. Lack of Personal Interest 6. More Government Restrictions 7. Incapable and Unscrupulous Management 8. Undue Speculation in the Shares of the Company 9. Impersonal Work Environment 10. Numerous Regulations
11. Oligarchic Management 12. Conflict in Interests 13. Lack of Motivation and Personal Touch 14. Social Evils 15. Separation between Ownership and Management 16. Fraudulent Promotion and Management 17. Adverse Impact of Large Scale 18. Lack of Continuity 19. Lack of Secrecy and a Few Others.
Joint Stock Company: Advantages and Disadvantages
Joint Stock Company – Advantages and Disadvantages
Advantages of Joint Stock Company:
1. Larger Capital- The huge capital required by modern enterprises would not be possible under other forms of organisations like sole individual proprietorship and even in partnership. The joint stock company by its widespread appeal to investors of all classes can raise adequate resources of capital required by large-scale enterprise.
2. Limited Liability- Liability of the shareholders of a company is limited to the face value of the shares they have purchased. It has a stimulating effect on investment. The private property of shareholder is not attachable to recover the dues of the company.
3. Stability of Existence- The organisation of a company as a separate legal entity gives it a character of permanence or continuity. As an incorporated body, a company enjoys perpetual existence.
4. Economies of Scale- Since the company operates on a large scale, it would result in the realisation of economies in purchases, management, distribution or selling. These economies would provide goods to the consumer at a cheaper price.
5. Scope for Expansion- As there is no restriction to the maximum number of members in a public company, expansion of business is easy by issuing new shares and debentures.
6. Public Confidence- Formation and working of companies are well regulated by the provisions of the Companies Act. The provisions regarding compulsory publication of some documents, accounts, director’s report, etc., create confidence in public. Their accounts are audited by a chartered accountant and are to be published. This creates confidence in the public about the functioning of the company.
7. Transferability of Shares- The shareholders of a public company are entitled to transfer the shares held by them to others. The shares of most joint stock companies are listed on the stock exchange and hence can be easily sold.
8. Professional Management- The management of a company vests in the directors duly elected by shareholders. Normally, experienced persons are elected as directors. Thus, the available skill is utilized for the benefit of the company. The company organisation, therefore, is like a bridge between the skill and capital.
9. Tax Benefits- Company pays lower tax on a higher income. This is because of the reason that the company pays tax on the flat rates. Similarly, company gets some tax concessions if it establishes itself in a backward area.
10. Risk Diffused- The membership of a company is large. The business risk is divided among several members of the company. This encourages investment of small investors.
Disadvantages of Joint Stock Company:
1. Difficulty in formation- The legal formalities and procedures required in the formation of a company are many. It has to approach large number of people for its capital and it cannot commence business, unless it has obtained a certificate of incorporation and a certificate to commence business.
2. Lack of Secrecy- Every issue is discussed in the meeting of the board of directors. The minutes of meeting and accounts of the firm’s profit and loss etc., have to be published. In this situation maintenance of secrecy is difficult.
3. Delay in Decision Making- In company form of organisation, all important decisions are taken by the board of directors and shareholders in general meeting. Hence, decision making process is time consuming. Board of directors itself has often to be at the mercy of bureaucracy.
4. Concentration of Economic Power- The company form of organisation gives scope for concentration of economic power in a few hands. It gives easy scope for the formation of combinations which results in monopoly. Large joint stock companies tend to form themselves into combinations or associations exercising monopolistic power which may prove detrimental to other firms in the same line or to the consumers.
5. Lack of Personal Interest- In company form of organisation, the day-to-day management is vested with the salaried persons or executives who do not have any personal interest in the company. This may lead to reduced employee motivation and result in inefficiency.
6. More Government Restrictions- The internal working of the company is subject to statutory restrictions regarding meeting, voting, audit, etc. The establishment and running of a company, therefore, would prove to be troublesome and burdensome because of complicated legal regulations.
7. Incapable and Unscrupulous Management- Unscrupulous individuals may bring economic ruin to the community by promoting bogus companies. The fraudulent promoters may be fool the public to collect capital and misuse it for their personal gain. Misuse of property, goods and money by the managerial personnel may harm the interests of the shareholders and create panic among the investing public.
8. Undue Speculation in the Shares of the Company- Illegitimate speculation in the values of shares of a company listed on the stock exchange is injurious to the interest of shareholders. Violent fluctuations in the values of shares as a result of gambling on the stock exchange, weakens the confidence of investors and may lead to financial crisis.
Joint Stock Company – Advantages and Disadvantages
(i) Limited Liability – The liability of the shareholders is only up to the face value of shares held by them. They are not personally liable. This reduces the degree of risk borne by an investor.
(ii) Transfer of Interest – The share of a public limited company can be sold in the market and can be easily converted into cash by selling them in open market, i.e., through stock exchange.
(iii) Perpetual Existence – Being distinct from the members, the death, insolvency, or retirement of its members does not affect the life of the company. Member may come and go, but the company goes on forever. It will only cease to exist only when specific procedure of winding up is followed.
(iv) Scope for Expansion – A company has large financial resources and more capital can be attracted from the public as well as through loans from banks and financial institutions. Thus there is greater scope for expansion. The investors are inclined to invest in shares because of the limited liability, transferable ownership and possibility of high returns in a company.
(v) Professional Management – A company can employ specialists and professionals in different areas of business and afford to pay high salaries to them.
(i) Complexity in Formation – As compared to other form of organization, formation of a company is more complex as it requires greater time, effort, procedures and extensive knowledge of legal requirements.
(ii) Lack of Secrecy – According to the Companies Act, each public company has to provide information from time-to- time to the office of registrar of companies. Such information is available to the general public also. As a result, it is difficult to maintain complete secrecy about the operations of company.
(iii) Impersonal Work Environment – The large size of a company makes it difficult for the owners and top management to maintain personal contact with the employees, customers and creditors.
(iv) Numerous Regulations – A company is subject to many legal provisions and compulsions in respect of aspects including audit, voting, filing of reports and preparation of documents, and is required to obtain various certificates from different agencies, viz. registrar, SEBI, etc. All this process is time consuming and expensive and reduces the freedom of operations.
(v) Delay in Decision-Making – In company form of organization, decision taking is time consuming process because all important decisions are taken either by the Board of Directors or are referred to general meeting, due to which many opportunities are lost.
(vi) Oligarchic Management – In a company, control is concentrated in a few hands, i.e., Board of Directors. They adopt various means to get themselves re-elected as directors year after year. Interests of shareholders are overlooked.
(vii) Conflict in Interests – There may be conflict of interest amongst various stakeholders of a company.
For example, the employees may be interested in higher salaries, consumers desire higher quality products at lower prices, and the shareholders want higher returns in the form of dividends and increase in the intrinsic value of their shares. These demands pose problems in managing the company as it often becomes difficult to satisfy such diverse interests.
Joint Stock Company – Advantages and Disadvantages
Merits of Joint Stock Company:
1. Limited liability of shareholders – The liability of shareholders being limited, they willingly invest their funds in the business of the company. The principle of limited liability encourages the people to invest their savings in a company. Limited liability has gone a long way in popularizing the company form of organisation all over the world.
2. Large financial resources – By dividing its ownership into shares of small denominations, the company can attract large amount of capital from thousands of individuals.
3. Scope for business expansion – With the availability of funds, expert administrators and talented managers, there is good scope for expansion of business of a company.
4. Transferability of shares – The members of a public company is free to transfer their shares. Unlike in case of partnership, other members’ consent need not be obtained for transfer of shares. Only the procedure lay down by the Act and the Company’s Articles should be followed.
5. Efficiency of management – The advantage occurs to a company because of its large size and resources. A large company is able to employ professionals in various functional areas of management who contribute to the efficiency of management.
6. Diffused risk – The risk of loss in a company is spread over a large number of members. Therefore, the risk of an individual investor is reduced.
7. Stability – The company form of organisation has a separate legal entity having perpetual succession. Its continuity is not affected by death, insolvency or insanity of its individual members or even Directors.
8. Social benefits – From society’s point of view, a company enjoys public confidence, provides avenues for investment by financial institutions, is helpful in developing management profession and results in widely spread base of business ownership.
Demerits of Joint Stock Company:
1. Difficulty of formation- The formation of a company is a long drawn process and numerous legal formalities and money are involved in this.
2. Excessive regulation by law – Since inception till liquidation a company is strictly regulated by law. Numerous legal formalities involved in matters relating to allotment of shares, filing of various Returns, documents, etc. if neglected, cause heavy penalties to the company.
3. Lack of motivation and personal touch – Since there is a separation of ownership and management, the Managers of a company do not tend to take as much personal interest in business as a proprietor or partner would do.
4. Oligarchic control – A company is owned by a large number of shareholders but it is managed by a few representatives who are elected to the Board of Directors. The Board of Directors enjoys very wide powers of management. It is the final decision-making authority on vital issues concerning business. This leads to concentration of power in a few hands.
5. Conflict of interests – There is always a possibility of conflict of interests of different groups in a company such as management and workers, the Board and shareholders and so on.
6. Speculation – Since the shares of a company are freely transferable, people are tempted to speculate in the prices of these shares. Reckless speculation has, therefore, been encouraged by the formation of Joint Stock Companies.
7. Delayed action – A company moves very slowly after the agreement of all diverse interests. It is very much unsuited to those lines of activity where prompt and quick decisions are essential for success. It is also less elastic or less adaptable as compared to proprietary firms.
8. Absence of secrecy – A joint stock form of business organisation cannot easily preserve secrets.
9. Social evils – From social point of view, the company can be held responsible for such evils as corruption in public life, concentration of wealth in a few hands and lack of industrial peace, etc.
Joint Stock Company – Advantages and Disadvantages
Advantages of Joint Stock Company:
(1) Huge Financial Resources:
As compared to sole proprietorships and partnership firm, a joint stock company can accumulate huge amount of funds. It facilitates the mobilization of savings of millions for the productive purposes. Since its capital is divided into share of small value, even an ordinary investor can contribute to its capital. In addition to this, easy marketability of corporate securities has further attracted investment from all types of investor.
Thus rich and poor, enterprising and conservative, careful and cautions persons can all take part in the financing of large industrial originations requiring huge amount of capital.
(2) Efficient Management:
There is a separation of ownership and management in case of Joint Stock Company. Elected board of directors is in position to appoint expert and qualified person for managing the various functions of business.
This promotes efficiency of management, because a band of experts can definitely take balanced decisions and can direct the affairs of the company in the best possible way. High efficiency in the management and control of industries which is possible in case of company only, is useful for the entire country.
(3) Limited Liability:
The liability of a shareholder of a company is limited to the face value of the share owned by him. In case of partly paid share, he can be required to pay only the unpaid value of the share. Thus, the shareholder knows in advance the maximum amount of risk that may have to be incurred.
Since the personal property of a shareholder cannot be attached to the debts of the company, it gives additional satisfaction to him while making investment in the company. Thus, the advantage of limited liability encourages many investors to invest in shares of joint stock companies.
(4) Transferability of Share:
The shareholders of a public company are free to transfer their share as and when liked by them. Stock exchange provides ready market for the purchase and sale of shares. The facility of tendering share provides liquidity to the investment of an investor and stability to company. It helps a company in tapping more resources.
(5) Diffusion of Risk:
In sole trader’s business and in a partnership firm, the risk is to be shouldered by one or a few persons. Future uncertainness discourages them from taking up new venture for fear of risk. On the other hand, in case of a company, the burden of risk falls on a large number of shareholders. This also attracts many investors. The rich feel secured and the poor are not unduly burdened. Moreover, the companies can take up new venture fearlessly.
As compared to other forms of organization, a company has greater stability, its “members may come and members may go but the company goes on forever.”
Thus, the life of a company is not dependent upon certain individuals and it continues to exist irrespective of death, insolvency or lunacy of its members including directors; any change in its owners or director does not affect as survival. The stability of a business organization is important not only for its owners but for its employees, consumer and society at large also.
(7) Public Confidence:
The formation, working and even winding up of a company are well regulated by the provision of Companies Act. The compulsory publication of some documents, accounts, director report etc. but a joint stock company creates public confidence. Besides this, constant supervision and regulation of a company by the Government through various legislation further, adds to public confidence.
(8) Scope for Expansion:
A company has potentialities to build a vast empire by expanding its business operations. This is made possible by large amount of financial resource and skilled management available to the company. It becomes possible for the company to organize production activity on a large scale and, thus reap the economies of scale. The economies of scale help in reducing cost of production and, thus help in increasing profitability and providing a sound financial base for growth.
(9) Social Benefits:
The company form of organization is an effective medium of mobilizing the scatter savings of the community and investing them for different commercial pursuits. It provides employment to many people, supplies goods and service to consumer, support several social projects and contributed a large amount of revenue to the Government.
(10) Lower Tax Liability:
A company, unlike sole proprietorship and partnership, has reduced tax burden at higher levels of income. This is so, because it, as a separate legal person, pays income tax at a flat rate fixed by the Finance Act from year to year; on the other hand, sole trader’s firm and partnership firm pay tax at a higher rate or higher levels of income. Further the joint stock companies enjoy several tax incentives resulting in a considerable reduction in the actual tax base.
(1) Difficult Formation:
Unlike a sole proprietorship and partnership, a joint stock company is not easy to form. It has to go through many formalities both at the time of formation and in the course of operation. These create difficulties and involve expense. In case of public limited company, additional formalities are to be completed for raising capital and for getting certificate of commencement of business. Thus, the irksome formalities and heavy cost involved in the process of formation discourage the formation of new companies.
(2) Excessive State Regulation:
The activities of a joint stock company are regulated by State much more closely than those of a sole proprietorship and a partnership firm. The legal formalities and restrictions are so many that they mar the smooth functioning of a company. The excessive regulations are made with a view to protect the interest of the shareholders and the public; but in practice, they put obstacles in their normal and effective working.
(3) Separation between Ownership and Management:
In case of sole proprietorship and partnership firm, owners and managers are the same persons. On the other hand, in case of a joint stock company, all the owners do not take part in its management and there is virtual divorce between ownership and management. It is managed by professional managers appointed by board of directors who do not have much stake in the company.
There is no direct relationship between efforts and rewards. The profits belong to shareholders; and the Board of Directors is given only a commission. The management does not take personal interest in the working of the company as in the case of sole trader’s business and partnership firm.
(4) Oligarchic Management:
Theoretically, the management of a joint stock company is democratic in character, but, in practice, it is a glaring example of economic oligarchy in company management. In most of the cases the owners of the company are divested of the power of control and an inner ring of shareholders manipulates the voting power to have its hold on the company.
Year after year, the same group of handful of shareholders manages to get it elected on the Board of Directors and tries to exploit the majority. Thus, it does not promote the interest of the shareholders in general.
(5) Reckless Speculation in Shares:
With a view to provide marketability, the shares of public limited companies are listed on the stock exchange. The prices of shares depend on economic and non-economic factors. In practice, the speculators try to fluctuate the prices of shares according to their suitability.
These artificial fluctuations of prices of shares have a harmful reaction on the companies and faith of the people may be lost. Sometimes, even the directors of a company also indulge in speculation of shares of the company for speculative purposes and personal gain.
(6) Conflict of Interests:
Unlike a sole trader’s business and a partnership firm, a joint stock company has to reconcile the conflicting interests of various groups associated with it. Shareholders need higher dividends; employees demand higher wages and salaries; customer expect better quality of goods at a lower price and the Government wants higher taxes.
The bigger the company the greater is the conflict. It is really difficult to satisfy such diverse interests. In sole proprietorship, there is hardly any scope for such conflict and, in partnership, such conflict may ultimately bring an end to the business; but in company it continues causing unhealthy rivalry, tension and unrest.
(7) Delay in Decision-Making:
As compared to sole proprietorship and partnership, the process of decision-making takes longer time in case of joint stock company; because no single person can take a policy decision. All the important decisions are taken either by the Board of Directors or by the general body of shareholders.
Calling the meetings of the Board or of the shareholders is time-consuming. It becomes difficult to decide quickly and act promptly; consequently, the opportunities for profit may be lost due to delay in decision-making.
(8) Fraudulent Promotion and Management:
The innocent investors may be duped by unscrupulous promoters and directors through various dishonest practices. The unscrupulous promoters may befool the public by putting an attractive prospectus before them. They may associate high-sounding names and give a rosy picture about the future of the company and in this way; innocent and ignorant investor may be trapped.
In the management of companies, the directors, the officers and other administrative personnel may try to make personal gains at the cost of members. Misuse of company funds and property in personal interest may harm the interests of the shareholders and create panic among the investing public. The company law has devised methods to check such fraudulent practices; but they have not proved enough to check them completely.
(9) Lack of Secrecy:
A public limited company has to circulate its accounts and annual reports among the shareholders and keep open some of its books for public inspection. This leads to lack of secrecy. In the management of companies, many persons are involved; therefore, it becomes difficult to maintain trade secrets. In case of sole proprietorship and partnership concerns, such secrecy is possible because a few persons are involved in the management.
(10) Disadvantages from Social Point of View:
From social point of view, a company form of organization is considered undesirable for the following reasons:
(a) The joint stock companies tend to form combinations exercising monopolistic powers against the consumers of their products and small producers in the same line;
(b) A company tends to concentrate economic power in a few hands;
(c) A company encourages reckless speculation in its shares on stock exchange. Due to this, prices of its shares fluctuate artificially which goes against the interests of the company and discourages fresh investment in companies.
(d) A company makes possible oligarchic management of its affairs. The oligarchy is harmful for the general body of shareholders.
On the basis of the advantages and disadvantages of a joint stock company discussed above, it may be concluded that the advantages of a company form of organization outweigh its disadvantages.
Most of the negative points listed above radiate, basically, from the weaknesses of the persons who are entrusted with the task of management; they are in no way a natural part of the system itself. If the management and control of a company is in right hands, no form of organization can be parallel to it.
The ideal applications of a company form of organization are:
(a) Very large industry, which needs enormous amounts of capital and which must be borrowed widely from the general public;
(b) The lines of business were, legally, company form or organization is a must, e.g., banking business can be run in the form of a company only;
(c) Very large business cooperation involving heavy risk and uncertainty; and business where the owners want limited liability.
Joint Stock Company – Advantages and Disadvantages
Advantages of Joint Stock Company:
1. Limited Liability:
The liability of shareholder is limited to the extent to which he has committed to contribute to the capital of the company. Thus there is no risk of all the assets of the person being lost because of a single mistake. This allows even small investors to invest in businesses as they know that they can make potentially high profits but their downside (risk of loss) is limited. They cannot lose more than what they have invested.
2. Larger Capital:
A Joint Stock Company form of organization alone is suitable for businesses requiring huge capital. Refineries, Power Generation, Car manufacturing, etc. are examples of industries where huge amount of capital is required. No other form of business is suitable as a small group of people cannot raise so much of capital.
A Joint Stock Company can raise large amounts of capital by approaching the general public for money. Such activity of raising money from the public is called Public Issue. Large projects are often funded by Joint Stock companies through the Public Issue route.
3. Greater Borrowing Capacity:
The amount of money a person or company can borrow is directly proportional to the amount of capital invested. For example, if a businessman invests Rs.100 in his business, he can approach banks to lend him, say, Rs.200. However, if he wants a loan of Rs.1,000, the bank will expect the businessman to invest his own money atleast to the extent of Rs.500.
Thus, the amount of money that a business can borrow depends on the capital invested by its owners. Since the amount of capital raised by a Joint Stock Company is greater, the amount that can be borrowed is also greater. Thus, large, capital intensive projects can be taken up only through the Joint Stock Company form of organization.
4. Transferability of Shares (Liquidity):
One of the reasons we save and invest money is that our money should be available to us in times of our need. This need is called need for “liquidity”. A sole proprietor who has invested his money in his business will not be able to pull it back in case of personal need, as this is equivalent to closing down of the business. In case of a Joint Stock Company, if any shareholder wants to quit the business for any reason, he or she is free to do so by transferring his/her shares to another person.
The operations or legal status of the company does not change on account of such transfer. This gives the investors’ confidence that they can get back their money in times of their need. Similarly, any person can become a member of a company any time by buying the required number shares.
5. Economics of Scale:
Unlike a Proprietary or Partnership concern, the scale of operations of a Joint Stock Company is large. Therefore, the company is able to reap the benefits of large-scale production. The company is able to buy material at relatively lower prices as it buys in huge quantities. Cost of production per unit is lower. Economies of scale result in lower costs, which in turn result in greater sales or higher profits.
6. Perpetual or Continuous Existence:
A Joint Stock Company and its business is unaffected by the death, insolvency or insanity of either shareholders or managers. It enjoys greater stability and hence can do better business. For example, Bennett, Coleman & Co. Ltd, which publishes the Times of India newspaper is a 175 year old company. ITC was incorporated in the year 1910.
It is a 105 year old company. It is expected to continue its operations in future also. When people deal with ITC, they are not relying on its CEO, directors or shareholders, but with the company itself. The CEO, directors and shareholders may change, but the company remains in existence.
7. Efficient Management:
A Joint Stock Company form of business is able to attract the best of management talent. It operates on a higher scale and therefore, can pay higher salaries to its employees. It can extend a lot of perquisites (perks) such as business class travel, accommodation in 5 star hotels, cab facilities, etc., to its directors and senior management.
Thus, it is able to attract and recruit professionals. These professionals bring in with them a lot of experience and expertise. Their vision and direction, coupled with vast experience, is likely to immensely benefit the company.
8. Democratic Management:
Management of a company is in the hands of ‘Directors’, who are elected by the shareholders. The election is for a specific term. The Memorandum of Association and Articles of Association provide guidelines for general management of the business. Matters of strategic importance are referred to shareholders in an Extraordinary General Meeting.
Decisions are taken on the basis of majority votes, liven the CEO (Chief Executive Officer) or Managing Director cannot do whatever he or she likes to do. Thus, the management is in accordance with principles of democracy.
9. Promotes Savings and Investment:
Joint Stock Company is an efficient medium of mobilizing the small savings of the society and channeling them into productive investments. Even persons with limited financial resources can participate in creation and operation of large corporates. There have been many inspiring stories of how people from the lower middle class invested their money in shares and became rich.
10. Greater Risk Bearing Capacity:
A Joint Stock Company is managed by professionals who have a small stake in the company. Thus, they are not overcautious due to fear of losing their earnings of a lifetime. At the same time, they are not totally careless, as they are answerable to the shareholders. Thus, a Joint Stock Company is the ideal platform for taking calculated risk. The large capital of the company also means that it has greater capacity to absorb losses.
11. Greater Accountability:
The formation and operations of a Joint Stock company are governed by statutory regulations. It is required to share a lot of its details with the general public, who can be potential investors in the company. Thus, the operations of a Joint Stock company are far more transparent. Since its affairs are always in scrutiny, it needs to be carefully managed. It cannot afford to lose the trust and confidence of the public in itself.
12. Greater Adaptability:
Unlike a sole proprietorship or partnership business, a Joint Stock company is an artificial person. It has different people working for it in different capacities. Thus, it is not limited by the skills or expertise of its owners. For example, a person who is good at a particular art, say dance of a particular form, starts a dance training institute.
She is very successful as she is not only a great dancer but also a great teacher. However, say after 25 years, new forms of dance become popular. People no longer want to learn the old form of dance. This results in her highly successful institute suddenly becoming a failure, as the success of the institute depends on the ability of the proprietor to adapt to change.
This situation is easily handled by a corporate as it will hire new dance teachers to run a similar business. There are many instances of organizations giving up one line of business and starting new businesses, in order to adapt to change. For example, Bajaj auto Ltd, a company that was once synonymous with Scooter production, has consciously decided that it will no longer produce scooters but make only motor cycles. This kind of adaptability is difficult to find in other forms of organization.
13. Synergy of Capital and Capability:
We have many times come across people who are immensely intelligent, talented and capable, but do not have money to execute their ideas. Similarly, there are people who have money but are not able to think of ideas where they can invest their money. The joint Stock company form of organization offers a synergy between Capital and Capability. Those who have money can simply invest their money and enjoy the profits. Those who have capability get requisite funding and are able to execute their ideas.
14. Use of Latest Technology:
Technological advancements are happening every day. New technology enables us to do things faster, better and more efficiently. However, in order to adopt new technology, we need money and we also need people who can understand the new technology. A sole proprietorship or partnership firm faces the constraint of skills as well as capital. A joint stock company has access to capital as well as talent and thus is able to adapt to new technology and benefit from it.
15. Scope for Expansion:
There is tremendous scope for expansion of business by a Joint Stock Company. It can raise the required resources and also recruit talented professionals to manage the expansion. Geographical expansion is also possible.
16. Diluted Risk:
The risk involved in carrying on a business is significantly deferred, as the risk is spread across a large number of shareholders. Thus, a Joint Stock Company can survive sudden depression or such other adverse developments relatively better.
17. Social Benefits:
A Joint Stock Company creates employment opportunities. It is able to supply better quality goods at lower prices on account of economics of scale. It contributes to the tax revenues of the Government. It is an investment vehicle that leads to growth of GDP of the country. Companies also have to comply with their Corporate Social Responsibility, thus contributing to the development of society at large.
1. Difficulty of Formation:
It is not easy to form a Joint Stock Company. It is a time consuming and expensive process and involves a lot of efforts. Lots of legal formalities and procedures need to be followed for registration of a company. In comparison, a sole proprietorship or partnership form of business is very easy to start.
2. Oligarchic Management:
Oligarchy means ‘rule by a few’. It is normally presumed that management of company is on democratic lines. However, shareholders holding a small number of shares are scattered across the country. They face practical difficulty to even attend the Annual General Meeting.
They also feel that on account of their small share, their presence and participation in meeting will not have any impact on decision making. This virtually rules out large scale participation of shareholders in management. There is a power struggle amongst various management groups. The managers dictate the events, while shareholders simply have to accept the decisions of the management.
3. Delay in Decision-Making:
The functioning of a company is bound by certain rules and procedures. While routine decisions are taken by concerned Department Heads, strategic decisions require meeting of Board of Directors and in some cases, meeting of shareholders. Thus, quick decisions cannot be taken.
Directors normally meet once in a quarter while shareholders meet once in a year. These meetings cannot be called at short notice. The entire process takes time. Thus, a Joint Stock company cannot take quick decisions and act on them.
4. Excessive Regulation:
The working of a company is governed by elaborate and difficult provisions of law at every stage. The management could be spending a major part of its time in statutory compliance. There are huge penalties for noncompliance. Too much regulation stifles growth.
5. Adverse Impact of Large Scale:
A joint stock company enjoys the benefits of large scale production. However, scale has its own disadvantages. In conditions of recession, although the production comes down, the expenses remain the same. For example, the rent paid for factory premises will remain the same even if production is reduced by half. Thus, cost of production per unit actually goes up. Also, large scale production results in problems of pollution, lack of cleanliness, traffic congestions, increased stress levels, etc.
6. High Cost of Operations:
A Joint Stock Company has to incur a lot of overhead expenses such as Audit fees, legal charges, secretarial department and other compliance charges. The salaries offered by a company are much higher. A lot of perquisites are often misused because the money is not being spent from the pockets of the person who is spending it. For example, senior employees might travel in business class because the company pays for the tickets. Thus, cost of operations of a joint stock company is much higher.
7. Lack of Personal Touch:
The Hierarchy of a Joint Stock Company does not allow direct contact of customers with managers and shareholders. Decisions have to be taken on the basis of market research studies or by analysis of changing trend in sales etc. The decisions of the company could be reactive rather than proactive. In case of proprietorship or partnership form of business, both suppliers and customers are personally known to the owners. Such personal touch is missing in case of Joint Stock companies.
8. Lack of Continuity:
While the Joint Stock Company enjoys a perpetual existence, its managers can be changed at frequent intervals. It is likely that succeeding managers have different viewpoints and might try to steer the company in a different direction. Frequent changes might pull the company in different directions.
9. Lack of Secrecy:
The functioning of a company is relatively more transparent. Many issues are documented and are open to public scrutiny. Management and shareholders keep changing. Hence, secrecy is hard to maintain.
10. Adventurous Management:
The managers do not have a stake in the performance of the company. However, certain managers may have an incentive on achievement of defined targets. Inability to achieve targets does not result in anything negative. Hence, management might become adventurous and take decisions that may or may not help their cause.
11. Neglect of Minority Interests:
In a company form of organization, decisions are taken on the basis of vote. Shareholders having a small percentage of the vote are unable to participate in the process as their share is insignificant. They cannot even elect their representative as Director. Thus, their interests are not taken care of.
12. Social Evils:
The company form of organization has resulted in growth of monopolies, corruption, and increase in pollution, increased cost of living, congestion and profiteering, which have had an adverse impact on the society.
13. Possibility of Fraud:
There is a possibility that the Joint Stock Company has been started by a ‘fly by night’ operator. Such a person collects capital from investors promising high returns, but does not start any project and swindles the money. There have been many such cases of Finance Companies collecting money from the public and disappearing without a trace.
14. Lack of Initiative:
A company form of organization does not provide scope for personal initiative. While shareholders do not take initiative as they do not have direct control, salaried officers do not wish to take responsibility for action that might result in a loss.
15. Concentration of Control:
Joint Stock Company form of organization provides scope for formation of combinations that result in a monopoly. This results in concentration of economic power and unfair trade practices could be followed to curb competition.
16. Encourages Speculation:
The shares of a Joint Stock Company can be listed in a Stock Exchange. While this is a good thing as it provides liquidity, it also provides opportunity for people to speculate on the change in prices of shares of the company.
17. Conflict of Interest:
There are various stake holders in a joint stock company. There are equity share holders, preference shareholders, long term lenders, employees, suppliers, customers, directors and regulators, all of whom have an interest in the company. There are possibilities of conflicts between the various stakeholders. These conflicts may have a negative impact on the performance of the company as management focus will get diverted to management of these conflicts.