Disadvantages Of Joint Stock Company

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Disadvantages of Joint Stock Company

Company from of business organization suffers form the following limitations:

1.    Difficult Formation. In order to form a company, a large number or legal formalities have to be complied with. A number of documents have to be dragged and filed with the Registrar of Companies. This requires large amount of expenses to pay for the services of the experts, printing and stationery charges, registration fee and other office and administrative expenses. A public limited company has to go through additional legal formalities to raise capital and to get certificate of commencement of business. This discourages the formation of new companies.

2.    Government Control. A company has to follow many provision of different acts. Even the internal working of the company is subjected to statutory restrictions regarding meetings, voting, audit, etc. The existence of so many legal restrictions in running the business might discourage the people to start new companies.

3.    Economic Oligarchy. The management of a company is supposed to be conducted as per the desires of the shareholders ho are owner of the company. But they have practically no say in the affairs of the company. Very often directors tend to mislead the shareholders by their ‘window dress’ reports. This makes control of shareholders illusory. They also create groups among the shareholders and thus consolidate their hold on the company by manipulation of voting power. Thus, separation of ownership and management result in oligarchic management and it makes control of shareholder illusory.

4.    Fraudulent Practices. The fraudulent promoters may misuse the capital raised from the public for their personal ends. This creates panic among the public. The directors of the company may also manipulate the prices of the shares in the stock exchange by manipulating the books of accounts of the company.

5.    Delayed Decision-making. The process of decision-making in a company is slow as compared to a sole trader or partnership firm. All the important decisions are to be taken either by the Board of Directors or the shareholders Calling the meetings of the Board or the shareholders consume a long time. Thus, crucial decisions are delayed in the process.

6.    Neglect of Minority. All the major issues in case of companies are decided by the shareholders having majority of shares. The majority shareholders may ignore the interest of the minority shareholders. The Companies Act provides measures against the oppression of minority, but the measures are not very effective in actual practice.

7.    Lack of Personal Touch. This is one of the greatest drawbacks of a company that it is not in a position to maintain personal touch which its workers, customers, suppliers and others. The impersonal management of the company may result in waste and inefficiency.

8.    Difficulty in Winding Up. It is very difficult to wind up a company. A very long and cumbersome procedure has to be followed to wind up the affairs of the company.

Looking to the merits and demerits of the company form of organization, it may be safely concluded that the advantages far outweigh the disadvantages. The drawbacks and limitations of the company form of organization which have been listed above are largely due to the weaknesses of the people who are entrusted with the task of management and not due to the inherent drawbacks in the system itself. SO the company form of organization is not bad in itself, but it may turn out to be bad if its management is put in wrong hands. It is because of its inherent strength in vitality that the company form of organization is ideality suited to the business activities where:

(i)    the required capital investment is heavy;

(ii)    the law does not permit the running of business in other forms of ownership, e.g., banking business cannot be run by sole proprietorship and partnership firm ; and

(iii)    the owners of the business wants to escape unlimited liability  ; and risk and uncertainly in the line of business selected.

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