A Joint-stock company can be considered the lifeblood of a country’s economy. However, the joint-stock company still to have some problems. We’ll go over some of the advantages and disadvantages of a joint-stock company formation in detail.
Advantages and Disadvantages of Joint Stock Company
There are many advantages and disadvantages of joint stock company. Following are the top advantages and disadvantages of joint stock company.
Advantages of a Joint Stock Company
1. Large Capital
The most significant advantage is that it enables large-scale capital mobilization that would otherwise be impossible to arrange. There is no limit to the number of members in a public company. By purchasing shares, a large number of people gain an interest in the company.
The fact that shares are transferable has given the company an added advantage in attracting more people. The Joint Stock Company is the most widely used business organization for raising large amounts of capital.
2. Extensive Expansion
The vast capital raised through the sale of shares, combined with the company’s earnings, provides sufficient scope for expansion. The company has a lot of potential for self-generating growth. Managerial skills backed up by a large sum of money result in huge profits and, ultimately, business expansion and growth.
3. Limited Liability
The liability of the company’s members is limited. Members cannot be called to pay more than the nominal value of the shares they own. This encourages people with little savings to invest in the company, resulting in ample capital for the company’s initial outlay and expansion.
4. Permanent Existence
The survival of the company is not dependent on the survival of its members. The law establishes the company and has the power to dissolve it. The company’s existence is unaffected by the death, insolvency, or transfer of shares of its members.
5. Transferability of Shares
Members can transfer their shares to a company without the consent of the other members. Because the company is listed on the Stock Exchange, its shares can be bought and sold easily. A shareholder can convert his holdings into cash because shares are freely transferable. The general public is encouraged to invest because of this facility and its limited liability.
6. Democratization of Ownership
The fact that a relatively small amount of capital can be mobilized and used collectively results in what Marshall refers to as the ‘democratization’ of ownership instead of business control.
While it allows anyone, big or small, risky or cautious, to become a part-owner, it also enables the entrepreneur to use his skill, initiative, expert knowledge, and business ability, which would otherwise be lost to the community.
7. Diffused Risk
Many shareholders share the risk of loss, and there is no risk of extreme hardship for a few people, as there is in a partnership or sole trader. Furthermore, the risk of loss is limited to the value of the shares.
There is no need for wealthy men to bear the burden of the business because large capital can be collected from all corners of the globe, from rich and poor alike, and managed under one management.
8. Organized Intelligence
The power of capital is supplemented by organized Intelligence, which improves the efficiency of management and direction. As a result of the limited liability and entity concept, administration skills and flexibility are improved.
The wisest and most skilled directors could be chosen, while those who are inefficient or indifferent could be removed. Because the company is not dependent on anyone, the Board of Directors and other top executives can use their collective Intelligence to develop sound and bold policies.
9. Tax Relief
As a separate legal entity, a corporation pays income tax at a flat rate set by the Finance Act from year to year. The rate is lower for higher-income individuals than for sole proprietors and partners.
10. Social Advantage
The social advantage of the company form of organization is that it employs a large number of people, produces goods that would otherwise be imported, and allows people from the middle and lower classes to become members of the company and earn profits.
11. Public confidence
The operation and financial position of joint-stock companies are open to the public. Their accounts are audited by Chartered Accountants, who certify that there are no errors or frauds. This instills trust in the minds of the general public.
Disadvantages of Joint Stock Company
1. Difficulty in Formation
Some legal criteria and formalities must be adhered to. The price is high. To raise capital, it must approach a large number of people. It must approach a large number of people to raise capital. It cannot begin operations until it obtains a certificate of incorporation. This is granted after a long period when all formalities have been completed.
2. Risky Speculation Encouraged
This type of organization encourages reckless trading of stocks on stock exchanges. This is a major evil in our country because stock exchanges frequently serve as “bush agencies” rather than aiding in sound investment or stability. Sometimes the management of a Joint Stock Company encourages share speculation for personal gain.
3. Fraudulent Management
Fraud has been a common feature of many businesses. The promoters and directors may engage in fraudulent practices. The company law has devised various methods to check fraudulent practices, but they are yet to be completely effective.
4. Delay in Decision-Making
A single person does not make decisions in this organization. The Board of Directors is in charge of all major decisions. It takes time to make a decision. Because of the delay in decision-making, many opportunities may be lost. A company lacks the promptness of decision-making that is characteristic of sole tradership and partnership.
5. Monopolistic Powers
There is a general tendency for a company organization to form monopolistic combinations that may harm other producers in the same line or consumers of the commodity produced.
6. Excessive Regulation by Law
The state that creates the company keeps a close eye on the activities of the company organization. The provisions of the Companies Act are quite elaborate and complex, and a company and its management must operate within the law.
Compliance with its provisions is required at all times, or the company and management will face penalties. The penalties are severe, and officers who violate the rules may face imprisonment in several cases. This interferes with the company’s proper operation.
7. Conflict of Interests
Because the management is not the owner, it is unconcerned about the interests of shareholders. Thus, the management body comprises people who have no interest in the business and are not owners.
Only a few people can govern in their preferred manner. Though the company is a democracy, in theory, it is an oligarchy in practice. Manipulation and speculation are encouraged by the company’s and its management’s lack of interest.
8. Lack of Secrecy
The management of businesses is still in the hands of a large number of people. Everything necessary is discussed at Board of Directors meetings. As a result, business secrets cannot be kept secret. Such secrecy is possible in sole proprietorship and partnership forms of organization because only a few people are involved in management.
9. Bureaucratic Approach
The bureaucratic habit of company officials avoids the trouble of some initiative because they receive no direct benefit from it; this often slows growth. This results in the classification of social organisms and the leveling down of character. The company organization does not have the same degree of flexibility and promptness in its formation as other organizations. Delays in making decisions have an impact on the growth of the business.
10. Credit limitations
Banks and financial institutions must consider the fact that a company’s shareholders have limited liability. If a company fails, its creditors can only rely on its assets to satisfy its claims.
These advantages and disadvantages of joint stock company are available to different types of joint stock company and to society, the government, and all citizens of the country, who benefit directly or indirectly from them. For these reasons, we can conclude that businesspeople are more eager to form a Joint Stock Company.