Although joint stock company has several advantages or benefits, if suffers from certain limitations or disadvantages such as complex legal formalities, slow decision making process, lack of secrecy etc.
The company requires too many legal formalities to form, operate and close. It is time consuming and expensive. Several legal documents are required to form a public company. They are Memorandum of Association, Articles of Association, Certificate of Commencement and Prospectus for issue of shares. So, long and complex legal formalities is the major disadvantage of joint stock company.
A company cannot keep secrecy about its operation. Public company is required to publish annual report and audited financial statements for public information. Lack of secrecy is a disadvantage for company because competitors can take undue advantage from such information.
Decision making is delayed in a company. The professional managers manage the company in a bureaucratic way. The board of directors meet at various intervals to make decisions. Shareholders meet in Annual General Meet to make major decisions. Company meetings require prior notice as per law. They cannot be arranged all of a sudden. This may lead to loss of business opportunities. So, slow decision making process is another disadvantage of joint stock company.
4. Lack of motivation
There is separation of ownership and management in a company. The shareholders own the company. But they have little involvement in the management of the company. The directors manage the company. But they lack motivation and incentive for better management. There is no link between efforts and reward for motivation. The salaried executives lack personal interest in the company.
The shares of a company are subject to speculation. The directors have access to inside information. They can manipulate such information to speculate in shares. A few individual can get control over company by holding majority shares. Unhealthy speculation in shares is a disadvantage of a company.
6. Conflict of interest
A company has many interest groups. They can be shareholders, employees, suppliers, creditors, government and community. Their interests vary. The conflict in their interests can badly affect the performance of the company. Corrupt management can exploit shareholders. Interdepartmental conflicts can be harmful.
All decisions in a company are made by majority vote. The promoters are in majority groups. The minority groups are not represented in the board of directors. The interests of minority are neglected by majority groups.
A company is subject to government regulations and control. It has to fulfill various legal formalities. It has to file various reports and statements to the government. This requires a lot of time, efforts and financial resources.Excessive government control is a demerit for a company.
Some notable disadvantages or demerits of joint stock company can be described as follows:
1. Legal formalities
The company requires too many legal formalities to form, operate and close. It is time consuming and expensive. Several legal documents are required to form a public company. They are Memorandum of Association, Articles of Association, Certificate of Commencement and Prospectus for issue of shares. So, long and complex legal formalities is the major disadvantage of joint stock company.
2. Lack of secrecy
A company cannot keep secrecy about its operation. Public company is required to publish annual report and audited financial statements for public information. Lack of secrecy is a disadvantage for company because competitors can take undue advantage from such information.
3. Delayed decisions
Decision making is delayed in a company. The professional managers manage the company in a bureaucratic way. The board of directors meet at various intervals to make decisions. Shareholders meet in Annual General Meet to make major decisions. Company meetings require prior notice as per law. They cannot be arranged all of a sudden. This may lead to loss of business opportunities. So, slow decision making process is another disadvantage of joint stock company.
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4. Lack of motivation
There is separation of ownership and management in a company. The shareholders own the company. But they have little involvement in the management of the company. The directors manage the company. But they lack motivation and incentive for better management. There is no link between efforts and reward for motivation. The salaried executives lack personal interest in the company.
5. Speculation
The shares of a company are subject to speculation. The directors have access to inside information. They can manipulate such information to speculate in shares. A few individual can get control over company by holding majority shares. Unhealthy speculation in shares is a disadvantage of a company.
6. Conflict of interest
A company has many interest groups. They can be shareholders, employees, suppliers, creditors, government and community. Their interests vary. The conflict in their interests can badly affect the performance of the company. Corrupt management can exploit shareholders. Interdepartmental conflicts can be harmful.
7. Neglect of minority
All decisions in a company are made by majority vote. The promoters are in majority groups. The minority groups are not represented in the board of directors. The interests of minority are neglected by majority groups.
8. Government control
A company is subject to government regulations and control. It has to fulfill various legal formalities. It has to file various reports and statements to the government. This requires a lot of time, efforts and financial resources.Excessive government control is a demerit for a company.
