Advantages and Disadvantages of Joint Stock Company
Ownership of a joint stock company comes with lots of advantages. Operated by the board of directors on behalf of shareholders, a Joint Stock Company has a separate legal existence whose shares can be bought by the shareholders. So before you opt to form this type of business entity, it’s a thoughtful action to go through the Advantages and disadvantages of Joint Stock Company. IT’s a business entity that’s often lauded for Limited Liability and stability reasons. But, on the other hand, slow processes and humungous legal work also add to the limitations of joint stock company. The following details outline further positives and negatives.
What is a Joint Stock Company?
A joint-stock company is a business entity that is owned by its investors/shareholders. Each investor owns the shares who are also the key investor in this business venture.
Generally, a joint stock firm is created to establish too expensive businesses to handle by an individual or even the government. The owners of a joint-stock company expect to share in its profits. A Joint Stock Company is can procure unlimited capital by issuing share and debentures which can be bought both by the classes and the public.
What are the Advantages of Joint Stock Company?
It’s the advantages of Joint Stock Company that draws many investors and talent towards it. Given that a huge sum is invested and the company is better positioned to meet the growing demands, the following benefits entail forming this business entity.
1. Capital Investment Assures Success
A large capital invested in the business paves a success route for the Joint stock company. This type of business venture is considered the most modern form of doing business as a substantial investment is not possible under other forms of entities like sole proprietorship or partnership.
As a joint stock company proposes the most successful business process, it seems more attractive of investment to investors of all classes who are ready to expect benefits. Moreover, no other forms of business can raise large amounts of capital as the Joint Stock Company.
The capital investment collected via shares and the generated profits contributes a vast scope for its expansion. Backed up by the best in business managerial talent and capital the business leads to new heights generating optimum earnings and immense business growth. A joint stock company gets more recognition in the world which demands business models based on modernization.
3. Limited Liability- One of the major advantages of Joint Stock Company
One of the common advantages of joint stock company is that the liability of the members/shareholders is limited. Thus, members cannot be called upon to pay anything more than the nominal value of the shares held by them.
Since the liability of the shareholders is limited to the face value of the purchased shares, it has a stimulating effect on investment. Moreover, should there be any loss in the business, the private property of the shareholder is protected against it.
4. Permanent and Stable
As a separate legal entity, the Joint Stock Company is more likely to exist longer than other business entities. The life of a joint-stock company doesn’t depend on the life of its members. Even in case of death of any investor or shareholder, the company can exist and operate as usual because the shares can be transferred to other members or the dependents of the deceased.
5. Shared Risk
Investors hold control over the operations; they also are accountable for the loss and risks, if any. In a joint-stock company, the risks are shared by the large number of shareholders. This means this type of business entity overcomes the limitations of partnership or sole proprietorship.
The risk of loss is also limited to the extent of the value of the share. This means the share of loss isn’t going to burden the shareholders having most of the shares of the business.
What are the Disadvantages of Joint Stock Company?
As every business involves risks hence comes the next part of the puzzle with the Disadvantages of Joint Stock Company. Since it’s a blend of private and public companies, you may have to face some issues from registration to delays in making a decision.
1. Joint Stock Company Formation process is complex
A joint-stock company typically has to go through more legal formalities and procedures during registration than other business entities. One possible reason is that it’s a blend of both general public and private investors.
A joint-stock company has to approach many people for its capital, and it cannot begin its operations without obtaining a certificate of incorporation and a certificate to commence business.
2. Excessive Restrictions
The bigger the organization, the stringent the regulations. There are various processes to make a joint-stock company operational such as meeting, voting, audit, etc. Furthermore, complying with the state authorities is another task that can be burdensome because of complicated legal regulations.
A joint-stock company and the management have to operate well within the laws and the provisions of the Companies Act, which are complex. It’s essential to comply with the provisions; otherwise, there are heavy penalties for officers in default ranging from monetary fines to imprisonment.
3. Delay in Decision-Making
Since the Board of directors and shareholders takes all the important decisions, the process is usually time-consuming. The Board of directors itself often has to be at the mercy of bureaucracy. In this form of business, decisions cannot be made by a single individual.
This means many opportunities may cost more as there is a delay in decision-making. However, it’s easy to make quick decisions in a sole proprietorship or partnership and execute them as per the owner’s discretion.
4. Lack of Secrecy is one of the disadvantages of Joint Stock Company
In a joint-stock firm, every key point and weakness is put on the discussion table in front of the board of directors. These discussions involve disclosing accounts of the firm’s profit and loss etc. In such a situation, maintenance of secrecy is not possible.
Since many persons control the management of companies, no business process can take place in private. However, meetings and activities can be held in sole proprietorship and partnerships as there are a few persons involved in the management.
5. Conflict of Interests
Conflict of interests is one of the most concerning disadvantages of joint stock company. The management isn’t affected by the interest of shareholders because not one individual is the owner. Instead of the owners, the management is composed of those with no interest in the business. It’s only a few who govern the organization the way they want. This may lead to a conflict of interests when there are more than one decision-makers with full authority.
One can determine from the advantages and disadvantages of a joint stock com¬pany whether it’s worth it or not. It eventually comes down to shareholders and investors what they have in their minds. Most of the disadvantages of Joint Stock Company exist due to human errors. If the management system and shareholders come along throughout the decision-making process, many risks can be mitigated.