September 21, 2017

Advantages and Disadvantages of Joint Stock Company

September 21, 2017

A joint stock company is a business organization. It is owned by general public who buy it shares. The person who holds shares of the company is known as shareholder.  The company is run and managed by board of directors elected by shareholders. Following are some of the advantages and disadvantages of the joint stock company.

Advantages and disadvantages of joint stock company

Advantages of Joint Stock Company

1. Limited Liability
The liability of shareholders is limited to the amount they have invested in the business.   It means their personal property remains safe in case of bankruptcy. This advantage encourages large number of investors to invest in the business. 

2. Large Capital
In the public limited company there is no limit of shareholders. This advantage helps the company to collect huge amount of capital from large number of shareholders. Furthermore, the company can raise capital to a large extent through issue debenture to public. 

3. Better Management
In the company ownership is separated from its management. The owners or shareholders cannot take part in the management of the company. The company is managed by board of directors elected by shareholders.  The directors hire experienced and qualified personnel for efficient management. The efficient management may help the company to take rational decisions and can produce better results for the company.

4. Transfer of Shares
The shares of the company are easily transferable. A shareholder can convert his holding into cash by selling his shares at any time in the stock exchange. This brings liquidation of investment.

5. Stability
The company has long life compare to sole proprietorship and partnership. It is not depending on death, retirement, insanity, or bankruptcy of a shareholder.  Also change of ownership and management does not affect the continuity of the business.

6. Ease of Expansion
A company has unlimited opportunities to finance new projects by issuing shares and debentures. It can also transfer the portion of its profit to reserve which can be used for future expansion.

7. Public Confidence
A company is required to submit its financial statements (Income statement and Balance sheet) to government. The accounts are audited by chartered accountants to make the accounts free from errors and frauds. This enables the company to enjoy public confidence.

Disadvantages of Joint Stock Company

1. Difficulty in Formation
The formation of a company is quite difficult than sole proprietorship and partnership. It requires a lot of formalities to be performed at the time of establishment. It must prepare registration certificate, commencement certificate, memorandum and articles of association and prospectus. The company also has to print share certificates and publish its prospectus through advertisements.

2. Taxation
The income of the company is dually taxed. First, the profit earned by company. Second, the dividend earned by shareholders. In addition, the company must pay corporate tax which is levied on its form. 

3. Lack of Secrecy
A company cannot maintain secrecy of its financial position. Every year financial annual statements are distributed among shareholders, registrar, bankers, and stock exchanges of the country.  This disclosure helps the competitors to know the strong and weak points of the concern.   On the other hand, secrecy can be maintained in sole proprietorship and partnership.   

4. Lack of Credit Standing
The company cannot enjoy high credit standing because of limited liability. If the assets are insufficient to pay off debts, the personal property of shareholder cannot be utilized. Inversely, sole proprietorship and partnership enjoy high credit standing due unlimited liability. 

5. Lack of Personal Interest
In the company shareholders don’t take part in the management of business. The company is managed by its employees who only take interest to the extent of their assigned tasks to justify their salaries. They don’t take personal interest for the growth and development of the company as in case of sole proprietorship and partnership.  

 6. Government Control
A company must compliance with rules and regulations of the state. It has to submit various reports and statements to the government. It must pay registration fee. It must pay all the taxes imposed on its form. There is a heavy penalty for non-compliance.


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