What is joint stock company?explain its advantages and disadvantages
Answers
Definition by Prof Honey. “Joint Stock Company is a voluntary association of individual for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership”.
Merits
Limited liability
Transfer of interest
Perpetual existence
Scope for expansion
Professional management
(iii) Limitations
Complexity in formation
Lack of secrecy
Impersonal work environment
Numerous regulations
Delay in decision making
Oligarchic management
Conflict in interest
A joint stock company is a business entity in which shares of the company's stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares (certificates of ownership).
Advantages: -
Large Capital:
The outstanding advantage is that it allows vast mobilization of capital which otherwise is not possible to arrange. In a public company, there is no limit to the number of members. A very large number of people acquire interest in the company by purchasing shares.
The fact that shares are transferable given an added advantage to the company for attracting greater number of people. No other form of business organisation is so well adopted in raising large amounts of capital as the Joint Stock Company.
Large Capital:
The outstanding advantage is that it allows vast mobilization of capital which otherwise is not possible to arrange. In a public company, there is no limit to the number of members. A very large number of people acquire interest in the company by purchasing shares.
Limited Liability:
The liability of the members of the company is limited. Members cannot be called upon to pay anything more than the nominal value of the shares held by them. This encourages people who have little to save to invest money in the company, thus providing ample capital for initial outlay and expansion of the business.
Permanent Existence:
The life of the company does not depend on the life of its members. Law creates the company and can dissolve it. The death, insolvency or the transfer of shares of members does not, in any way, affect the existence of the company.
Tax Relief:
A company pays income-tax as a separate legal person at a flat rate fixed by the Finance Act from year to year. In case of higher incomes, the- rate is lower than that charged in case of sole proprietors and partners.
Social Advantage:
The social advantage of company form of organisation is that it affords employment to so many persons, produces articles which otherwise would have been imported and affords opportunity to middle and lower class of people to become members of the company and earn profits.
Disadvantages: -
Difficulty in Formation:
The legal requirements and formalities required to be completed are so many. The cost involved is quite heavy. It has to approach large number of people for its capital. It cannot start its business unless certificate of incorporation has been obtained. This is granted after a long time when all the formalities are completed.
Reckless Speculation Encouraged:
This form of organisation encourages reckless speculation in shares at stock exchanges. This is an evil of great magnitude in our country because in many cases stock exchanges act as ‘bush agencies’, rather than aid to sound investment or stability. Sometimes the management of Joint Stock Company encourages speculation in shares for its personal gains.
Fraudulent Management:
Frauds have been a common feature of many a company. The promoters and directors may indulge in fraudulent practices. The company law has devised various methods to check the fraudulent practices but they have not proved to check them completely.
Monopolistic Powers:
There is, generally, tendency for company organisation to form themselves into combinations exercising monopolistic powers which may react detrimentally to other producers in the same line or to consumers of the commodity produced.
Lack of Secrecy:
The management of companies remains in the hands of many persons. Every important thing is discussed in the meetings of Board of Directors. Hence secrets of the business cannot be maintained. In case of sole proprietorship and partnership forms of organisation, such secrecy is possible because a few persons are involved in the management.
Delay in Decision-Making:
In this form of organisation, decisions are not made by single individual. All important decisions are taken by the Board of Directors. Decision-making process is time-consuming. So many opportunities may be costly because of delay in decision-making. Promptness of decisions which is a common feature of sole tradership and partnership is not found in a company.