Advantages and Disadvantages of Joint Stock Company

After reading this article you will learn about the advantages and disadvantages of joint stock company.

Advantages of a Joint Stock Company:

The advantages of forming a company rather than carrying on partnership business are as follows:

1. Large Capital:

The outstanding advantage is that it allows vast mobilization of capital which otherwise is not possible to arrange. In a public company, there is no limit to the number of members. A very large number of people acquire interest in the company by purchasing shares.

The fact that shares are transferable given an added advantage to the company for attracting greater number of people. No other form of business organisation is so well adopted in raising large amounts of capital as the Joint Stock Company.

2. Vast Scope of Expansion:

The vast capital collected by means of shares coupled with the earnings of the company contribute sufficient scope for its expansion. The company offers an excellent scope of self-generating growth. The managerial talents supported by vast finance leads to huge earnings and to ultimate expansion of the business and growth.

3. Limited Liability:

The liability of the members of the company is limited. Members cannot be called upon to pay anything more than the nominal value of the shares held by them. This encourages people who have little to save to invest money in the company, thus providing ample capital for initial outlay and expansion of the business.

4. Permanent Existence:

The life of the company does not depend on the life of its members. Law creates the company and can dissolve it. The death, insolvency or the transfer of shares of members does not, in any way, affect the existence of the company.

In nut shell it may be said:

“Members may come, members may go;

But the company goes on forever.”

5. Transferability of Shares:

The shares in a company are transferable and members can transfer their shares without the consent of other members of the company. The company is listed with the Stock Exchange and hence company’s shares are readily sold and purchased. As shares are freely transferable, a shareholder can convert his holding into cash. This facility coupled with the limited liability has an encouraging investment by general public.

6. Democratization of Ownership:

The fact that relatively small amount of capital can be mobilised and employed collectively results in what Marshall call ‘Democratization’ of ownership as distinguished from the control of business.

While it permits all types of people, big or small, venturesome or cautious, to become part owners, it permits the use of skill and initiative of the able entrepreneur, his expert knowledge and business ability which would otherwise be lost to the community.

7. Diffused Risk:

The risk of loss is to be shared by the large number of shareholders and the possibility of huge hardship on few persons as in the case of partnership or sole trader does not exist. Moreover, the risk of loss is also limited to the extent of the value of share.

There is no need for the wealthy men to bear the burden of the business as large capital can be collected from far and wide, and from rich and poor, controlled under one management.

8. Organized Intelligence:

The power of capital is supplemented by organised intelligence which makes for increased efficiency of direction and management. The skill and flexibility of administration is enhanced as a result of limited liability and entity idea.

The wisest and the most skillful directors may be chosen and one found inefficient or indifferent could be removed. The company being independent on any single man, the organized intelligence of the Board of Directors and other top managers is available for sound and bold policies.

9. Tax Relief:

A company pays income-tax as a separate legal person at a flat rate fixed by the Finance Act from year to year. In case of higher incomes, the- rate is lower than that charged in case of sole proprietors and partners.

10. Social Advantage:

The social advantage of company form of organisation is that it affords employment to so many persons, produces articles which otherwise would have been imported and affords opportunity to middle and lower class of people to become members of the company and earn profits.

Disadvantages of Joint Stock Company:

Despite so many advantages it has got many disadvantages which are as follows:

1. Difficulty in Formation:

The legal requirements and formalities required to be completed are so many. The cost involved is quite heavy. It has to approach large number of people for its capital. It cannot start its business unless certificate of incorporation has been obtained. This is granted after a long time when all the formalities are completed.

2. Reckless Speculation Encouraged:

This form of organisation encourages reckless speculation in shares at stock exchanges. This is an evil of great magnitude in our country because in many cases stock exchanges act as ‘bush agencies’, rather than aid to sound investment or stability. Sometimes the management of Joint Stock Company encourages speculation in shares for its personal gains.

3. Fraudulent Management:

Frauds have been a common feature of many a company. The promoters and directors may indulge in fraudulent practices. The company law has devised various methods to check the fraudulent practices but they have not proved to check them completely.

4. Delay in Decision-Making:

In this form of organisation, decisions are not made by single individual. All important decisions are taken by the Board of Directors. Decision-making process is time-consuming. So many opportunities may be costly because of delay in decision-making. Promptness of decisions which is a common feature of sole tradership and partnership is not found in a company.

5. Monopolistic Powers:

There is, generally, tendency for company organisation to form themselves into combinations exercising monopolistic powers which may react detrimentally to other producers in the same line or to consumers of the commodity produced.

6. Excessive Regulation by Law:

The State that creates the company, minutely watches the activities of the company organisation. A company and the management have to function well within the law and the provisions of Companies Act are quite elaborate and complex.

At every step, it is necessary to comply with its provisions lest the company and the management should be penalised. The penalties are quite heavy and in several cases, officers in default can be punished with imprisonment. This hampers the proper functioning of the company.

7. Conflict of Interests:

The management does not care for the interest of shareholders because the management is not the owner. Actually, the management body is not composed of owners, it is composed of those who have no interest in the business.

It is only the few who govern the way they like. Though, in theory, company is a democracy but in actual practice it is oligarchy. The lack of interest between the company and its management encourages manipulation and speculation.

8. Lack of Secrecy:

The management of companies remains in the hands of many persons. Every important thing is discussed in the meetings of Board of Directors. Hence secrets of the business cannot be maintained. In case of sole proprietorship and partnership forms of organisation, such secrecy is possible because a few persons are involved in the management.

9. Bureaucratic Approach:

The bureaucratic habit of company officials to shirk trouble of some initiative because they get no direct benefit from it; often retard the growth. This leads to classification of social organism and leveling down the character. The company organisation does not enjoy the same flexibility and promptness in the making as other organisations do. The delays in taking the decision affect the growth of the business.