Advantages & Disadvantages of Joint Stock Company
The joint stock company offers so many advantages that it is generally popular all over the world. The advantages and disadvantages of joint stock company are discussed below:
Advantages of Joint Stock Company
A very first advantage of the joint stock company is the liability of shareholders in a company is limited to the face value of the shares they have purchased. The limited liability encourages many people to invest in shares of joint stock companies. If the funds of a company are insufficient to satisfy the claims of the creditors, no members can be called to pay anything more than the value of shares held by them.
Huge Financial Resources:
A company can collect a large sum of money from a large number of shareholders. There is no limit on the number of shareholders in a public company. Since its capital is divided into shares of small value even a person of small means can contribute to its capital by simply purchasing its shares. It facilities the mobilization of savings of millions for the productive purposes. In addition, a company can borrow from banks to a large extent and also issue debentures to public.
Transferability of Shares :
The best advantage of the joint stock company is that the shares of a public company are freely transferable. This transferability of shares brings about the liquidity of investment. It encourages many people to invest. It also helps a company in tapping more resources.
Due to its separate legal existence, it has perpetual existence. The life of a company is not dependent die or become insolvent. The members of a company may go on a company. The stability of business is of great importance to the society as well as to the nation.
Flow of Risk:
In sole proprietorship and in the partnership business, the risk is shared by few persons. But in the company, the number of shareholders is large, so many persons share risk. Therefore, the burden of risk upon any individual is not huge. This attracts many investors. It enables companies to take up new ventures.
In company, ownership is separate from management. A company has enough resources to utilize the services of experts and managers who may be highly specialized in different fields of management. It can attract talented persons by offering them higher salaries and better career opportunities. The efficient management will help the company to take balanced decisions and can direct the affairs of the company in the best possible manner. It also helps to expand and diversify the activities of the company.
Economies of Large Scale Production :
Large scale production of modern days is the result of company form of organization. This results in economics in production, purchase, marketing, and management. These economies will help the company to provide quality goods at lower cost to the consumers.
A company enjoys a greater public confidence and reputation in the market due to legal control, publicity of accounts and perpetual existence. Audit of Joint Stock Company is compulsory. A company’s financial accounts and statements are published, circulated and are open to public inspection. Therefore, public have enough faith in it. So, it can get a loan from different financial institutions.
The company is managed by the elected representatives of shareholders called the ‘directors’. Directors are responsible and accountable to the general body of shareholders. Decisions are taken by a majority of votes completely based on democratic principles. This prevents in the mismanagement of a company.
The company provides an opportunity to mobilize scattered savings of the community. It also creates employment opportunities. Due to large-scale production consumers get cheaper goods. The society is supplied with enough quantity of goods. The government gets income in the form of taxes.
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Disadvantages of Joint stock company
Difficulty in Formation :
A very first disadvantage of the joint stock company is not easy to form and establish. A number of persons should be ready to associate with getting a company incorporated. It requires a lot of legal formalities to be performed. The shares will have to be sold during the prescribed time. It is both expensive and risky.
Delay in Decisions:
In company decisions making process is time-consuming. All important decisions are made by either Board of Directors of by General Annual Meetings. So many opportunities may be lost due to delay in decision making.
Lack of Privacy:
A company has to observe many legal formalities. Most of the business activities are decided through meetings. Profit and Loss Accounts and Balance Sheet are required to be published. So trade secrets cannot be maintained.
Speculation in shares :
The Joint Stock Companies facilitate speculation in the shares at stock exchanges. It has been found that even the directors and the managers of the company indulge in manipulating the value of shares to their advantage. When they want to purchase the shares they lower the rate of dividend and when they want to dispose of the shares they declare dividends at a higher rate.
Separation of Ownership and Management :
A company is owned by shareholders but managed by directors. The shareholders play an insignificant role in the working of the company. Though directors are owners of some qualification shares only, yet the result of their activities are to be borne by all shareholders. The profit of the company belongs to shareholders and the Board of Directors is paid only on a commission. There is no direct relationship between efforts and rewards. So the management does not take the personal interest in the workings of a company. Hence, they may work against the interest of a vast majority of shareholders.
The shareholders who are the real owners do not have much voice in the management. A handful of shareholders, which also manage the affairs of the company, are able to have control over it. Theoretically, the company is democratic, but in practice, it is mostly a case of oligarchy (Rule by few). A few persons hold power and control and try to exploit the majority. Thus, it does not promote the interest of the shareholders in general.
A company has to observe excessive regulations imposed by the law of the country. The excessive regulations are made with a view to protecting the interest of the shareholders and the public but in practice, they put obstacles in their normal and effective working. A lot of precious time, efforts, and financial resources are wasted in complying with statutory requirements.
Neglect of Minority :
All major issues in a company are decided by the shareholders having a majority of them. Majority group always dominate over the minority group whose interest are never represented in the management. The company act provides measures against the oppression of the minority, but the measures are not very effective.
Conflict of Interest:
In a company there are many parties whose interest may clash and the result may be the conflict of interests. The management, the shareholders, the employees, the creditors and the government may have their own individual interests. Thus, a permanent type of conflict of interests may continue to exist in the companies. These conflicts generally lead to inefficiency in the management and reduce employee morale.