Advantages and Disadvantages of Joint Stock Company
You need all the information about the benefits and drawbacks of a joint stock company. A joint stock company is an organization with legal status that consists of two or more people and has a common seal, perpetual existence, and separate legal existence.
Shares freely transferable and made up of the company's capital have minimal liability for their holders. It is a made-up thing produced by the law.
A joint stock company can raise an unlimited amount of capital by issuing shares and debentures that can be purchased by both the wealthy and the common people.
The Joint Stock Company attracts investors and top managerial talent due to attributes like restricted liability and the stability of the business.
As a result, a joint stock company is better equipped to handle the expanding demands of contemporary industry.
Historically, merchants have sought solutions to reduce the danger and complexity of financing significant business ventures. Early in the seventeenth century, joint-stock firms were established in Europe to reduce the risks and expenses related to specific company kinds.
In a joint-stock firm, individuals might buy shares representing a portion of the business, making the new shareholders investors and partial owners. In this manner, the risk and expense of conducting business were shared among many people.
The stock exchange, another unique aspect of the corporate world, became widely used by joint-stock businesses. Shareholders in a corporation could frequently sell their shares for a large profit on the stock market.
The price of shares changed based on how profitable and successful the firm was seen to be because a share's worth fluctuated. In such a structure, corporate earnings were also shared, and shareholders received dividends based on their ownership interest. These earlier business institutions from the 1600s are the ancestors of the twenty-first century's publicly traded firms and stock exchanges.
Advantages of a Joint Stock Company:
Significant financial resources:
An enormous amount of money can be amassed by a joint stock business instead of sole proprietorships and partnership firms. It makes it easier to use millions of dollars worth of savings for profitable endeavors. A regular investor can contribute to its capital because it is divided into shares with minor values. Additionally, the ease with which corporate assets can be sold has drawn investment from different investors. So both wealthy and poor, risk-takers and cautious people can participate in the financing of large industrial originations that need a significant amount of capital.
Under other organizational structures, such as sole proprietorship and even partnerships, it would not be able to raise the enormous capital modern businesses need. A joint stock firm may produce the money required for a large-scale operation because of its widespread appeal to investors of all classes.
A firm shareholder has a liability strictly capped at the face value of the shares he owns. He may only be obligated to pay the unpaid value of the share in the case of a partially paid share. As a result, the shareholder is aware of the greatest amount of risk that could be involved. It offers him additional joy when investing in the firm because a shareholder's personal property cannot be tied to the company's debts. Because of the benefit of restricted liability, many investors own shares of joint stock corporations.
The advantages of scale:
Economies of scale refer to the cost advantages that a large organization has over smaller businesses. As production volume rises, the cost per unit will decline. A joint stock firm provides its stockholders with economies of scale. One of the main benefits is that it can provide businesses with considerable investment needs with a steady supply of capital. Each shareholder's risk is decreased by the earnings volatility's leveling out and the broader pool of shareholders.
Development and Expansion Potential:
Unlike other company arrangements, joint stock corporations have the potential for growth and expansion. Individuals can buy shares in a joint stock company hoping the business will develop over time and provide large profits. The corporation's board of directors makes choices about how much emphasis is placed on growth, which industries to enter, where to make investments, etc.
Benefits from Taxation:
When a business is set up as a joint stock company, the shares are not taxed until sold. Because the capital of the business can be distributed among numerous investors, this type of organization also requires less paperwork and is simpler to establish in the market.
Since shareholders now own a portion of the business, they will demand assurance that their money is being invested correctly. They can then vote on choices like moving the company's headquarters or selling off a certain product. This greater accountability enhances judgment and facilitates risk assessment.
The Companies Act provisions effectively control corporations' creation and operation. Public confidence is increased by the regulations requiring the publishing of certain papers, such as accounts and director's reports. A qualified accountant will audit their financial statements before being made public. As a result, the public develops faith in the company's operations.
Disadvantages of a Joint Stock Company
A joint stock corporation is more difficult to establish than a sole proprietorship or partnership. It must go through several procedures at the moment of formation and throughout the operation. These present challenges and cost money. Additional procedures must be followed in the case of a public limited company to raise money and get a certificate indicating the start of operations. As a result, the burdensome formalities and high costs associated with company formation deter the creation of new businesses.
Lack of Secrecy:
Because they must be honest and upfront with their shareholders, the corporation will be forced to disclose details about its business, finances, and other delicate matters. Another potential drawback is that since outsiders (or rival businesses) will have access to some information, it will be simpler for them to obtain insider knowledge and advantages.
The common delay in decision-making is one of the drawbacks of a joint stock company. This is evident when people refuse to give in to other people's opinions, which makes it difficult for them to decide what to do. When board members' interests do not coincide, there is a greater likelihood of internal conflict inside the Joint Stock Company. Another drawback is that several levels of authority may obstruct decision-making within the organization.
More government regulations and limits:
Joint stock businesses are subject to several restrictions. They can only be founded in certain circumstances, and before they can even start operating, they must abide by several rules and regulations. The same laws as other businesses, such as limitations on the amount of allowed foreign investment, bind them.
Immoral or unethical Management:
Joint stock corporations have many drawbacks, but one that stands out is how shady Management may take over and run the business. The board of directors determines each member's compensation, and some managers are even permitted to exploit their staff members to increase their income. Additionally, there are interest conflicts between stockholders and executives. Because business shares cannot be sold until the firm has issued them, there is also a significant risk of overvaluation.
A lot of state regulations:
The state regulates a joint stock company's operations far more strictly than a sole proprietorship or a partnership corporation. Because there are so many legal formalities and constraints, businesses need help to operate efficiently. To protect the interests of shareholders and the general public, excessive rules are created; nevertheless, these regulations make it difficult for businesses to operate normally and efficiently.
Keeping Ownership and Management Apart:
Owners and managers are the same people in partnerships and sole proprietorships. On the other hand, a joint stock firm has a virtual separation between ownership and Management because all of its shareholders do not participate in its Management. It is run by qualified Management chosen by the board of directors who have little personal investment in the business. In contrast to partnerships and sole proprietorships, the company's Management does not personally become involved in its operations. The relationship between effort and rewards is indirect. Shareholders own the profits, and the Board of Directors receives a commission.
Promotion and management fraud:
Through various dishonest tactics, unscrupulous promoters and directors may deceive unsuspecting investors. The dishonest promoters may dupe them by presenting an alluring prospectus to the audience. They might link impressive names and paint a positive picture of the company's future, trapping uninformed and innocent investors. Directors, officers, and other administrative staff members may attempt to obtain a personal advantage over members when managing a company. The misuse of company assets for personal gain could be detrimental to shareholder interests and frighten away potential investors. Corporate legislation has put out measures to stop such fraudulent operations, but they have yet to be proven effective enough to stop them entirely.
Although a joint stock company's Management is ostensibly democratic, it is a blatant illustration of economic oligarchy in corporate governance. The majority of the time, the company's original owners lose their power of Management, and an inner circle of shareholders manipulates the voting process to maintain control of the business. The same small group of shareholders consistently succeeds in getting elected to the Board of Directors and tries to take advantage of the majority. Consequently, it does not advance the interests of shareholders generally.
Contrary to a sole proprietorship and a partnership, a joint stock corporation must resolve the divergent interests of numerous parties connected to it. The government wants higher taxes, employees want higher salaries, customers want better products at lower prices, and investors want more dividends. It is challenging to accommodate such a wide range of interests. The dispute increases with the size of the company. Such conflict is rare in sole proprietorships, and it may eventually put an end to the business in partnerships. Still, it persists in corporations, leading to unhealthy rivalry, tension, and unrest.
Nearly all of the major firms we learn about in the news or watch on television are a type of corporation called a joint-stock company. Partnerships and sole proprietorships cannot challenge a Joint-Stock Company's dominance on the global stage. All large-scale organizations operate based on this approach.