Merits and Demerits of Joint Stock Company?

Introduction: - A Joint stock company is a separate entity formed by a number of persons contributing a fixed capital in the formation of shares (sharing the ownership of the company) with liability of each share holder being limited to his investment in the company only. The management of the company is done professionally by experts who are the representatives of the shareholders are called the board of Directors.
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Definition: - “A joint stock company is a voluntary association of individual for profit, having its capital divided into transferable shares, the ownership of which is the condition of membership.” Defined by.............. PROF. (H.L.Haney)



Merits of Joint Stock Company is as Follows: -

1.       Large Capital: -It is possible for a joint stock company to raise huge financial resources. There is not maximum limit on membership in a public limited company. Shares issued are available in small denominations. Therefore people can invest any small amount as per their needs and capacity due to the features of limited liability. Free transferability of shares etc. many investors are attracted to become shareholders of the company. Loans can be taken from banks and other financial institutions by the company.

2.       Democratic Management: - Though shareholders elect the Board of Directors, who manage the business efficiently, the directors are accountable to shareholders, their activities are supervised and controlled by shareholders indirectly.

3.       Transferability of Shares: -There is free transferability of shares in a public limited company. No permission is required to be sought from the directors or members of the company for buying or selling shares. However, a private limited company, does not permit free transferability of shares.

4.       Limited Liability: - The liability of a member in a public limited company is limited to the extent of the unpaid amount of the shares held by him. Since the company has an independent legal status, its liabilities are its own.

5.       Expert Services: - Due to large financial resources available with joint stock company, it can appoint experts for managing each area or functions of the company business, by paying attractive salaries to them, these brings in a great degree of professionalism and thereby, efficiency in management of business.

6.       Relief Taxation: - The companies are required to pay taxes at flat rate. The amount of tax on a high taxable income therefore may be less for a joint stock company than individuals in a same tax bracket.

7.       Public Confidence: - Joint stock company enjoys public confidence. The working of joint stock companies in India is governed by the provisions of Indian Companies Act, 1956.

8.       Scope for Growth and Expansion: - There is possibility of growth and expansion in the company business. The company can raise large financial resources. Attractive salaries can be paid to engage the services of experts for business expansion and for managing the business professionally.


Demerits of Joint Stock Company is as Follows: -

1.       Difficulty in Formation: -The formation of the company is in itself a very difficult and involves too many formalities. Promoters have to prepare and submit various documents to the registrar of companies for approval i.e. Articles of Association, Memorandum of Association etc. the public limited company cannot commence business without obtaining a certificate of commencement of business. Registration of Joint Stock Companies is compulsory as per Indian Companies Act, 1956. Thus the formation is complicated, costly and time consuming.

2.       Delay in Decisions: - In sole trading concern, and partnership firm decisions can be taken quickly. Company business is managed by Board of Directors who are not owners of the company. Therefore, there is no direct motivation for directors to give their best to the company. Moreover, for taking various decisions and getting them approved from share holders, they have to hold board Meeting and share holders meeting, for which a proper procedure has to be followed. That results into delay in decision making, good business opportunities may be lost.

3.       Excessive Government Control: - There is a lot of government interference in the working of the company. Various rules and regulation of the companies Act have to be strictly followed by the company, the non – compliance of any of these provisions results into penalties for the officers involved.

4.       High cost of Management: - The management of joint stock company form of organization is costly. The formation involves availing of the expert services of many professional like underwriters, financial and technical experts, share brokers, solicitors, bankers etc.

5.       Undue Speculation: -since directors are responsible for the management of the company, they sometime use the confidential information for speculation and for personal gains. This results in sudden fluctuations in prices of shares in stock exchange, adversely affecting the public confidence.

6.       No Personal Contact: -Due to very large size of the organization, employees feel that their efforts are not recognized and appreciated, their work related problems are not taken care of. as a result they feel demoralized and their productivity declines.

7.       Lack of Secrecy: -There is no business secrecy involved in the company form of organization since it has to fulfill various statutory requirements, e.g. as per Indian Companies Act, 1956, every company must publish its annual accounts and certain other documents.


8.   No Direct Effort Reward Relationship: -Since the ownership and management are separate, there is no direct relationship between the efforts and rewards. This can be de motivating for the owners of the company

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