QS Study

Disadvantages of Joint Stock Company

When some people voluntarily construct an organization by investing their money for the purpose of earning profit according to the rules and regulations of the respective country is called Joint Stock Company. It is a company whose stock is owned jointly by the shareholders.

Although Joint Stock Company has several advantages side by side it also has some disadvantages which are mentioned below:

The complexity of formation: Company is a business organization recognized by law. Therefore its formulation becomes very lengthy, formal and needs heavy expenditure for this purpose. For this reason, many people are reluctant to incorporate this business.

Bureaucracy: Planning, regulating and decision making of other aspects comes from directors, it gets practiced of salary taken by the third party. Therefore there is a chance of creating a gap between the investors and the customers of the products and it is also a slow process Management is suffered by bureaucratic problems.

Heavy administrative expense: In a Joint Stock Company, huge extra expenditure is needed for the purpose of organizing several activities, practicing these activities, ensuring the security of goods of stock, portfolios, documents, auditing accounts etc. Therefore, the net profit becomes decreased and ultimately the investors may deprive.

Negligence than to shareholders: Though shareholders are considered as the true owner of the company, directors sometimes prevent their interest and try to direct the company according to their own interest. That’s why shareholders become dependent on the directors and sometimes deprived of their deserved rights.

The scope of fraud: Some fraudulent businessmen tend to betray normal pack in the name of selling shares. The separation of ownership from management increases the possibility of frauds as the elected directors may form or wind up the company or grabbing the investments of the innocent shareholders.

Expose of secrecy: Under certain obligations such as to maintain accounts and thus publish its annual accounts, to file Memorandum and Article of Association etc., it becomes tough for a joint stock company to maintain its secrets appropriately because all its internal information is exposed through all these. This lack of secrecy causes harm to the organization.

A concentration of economic power and wealth in few hands: A joint stock company is a large-scale business organization having huge resources. This gives a lot of economic and other power to the persons who manage the company. Any misuse of such power creates unhealthy conditions in the society.

Delay in policy decisions: There are chances of delay in decision making because of the excessive formalities and urgent matters may not be attended to immediately. Generally, policy decisions are taken at the “Board of Directors” meetings of the company. A lot of time is wasted in convening the meetings and taking decisions.

Excessive government control: Joint stock companies are regulated by the government through the Companies Act and other economic legislation especially, public limited companies. If these legislations are not obeyed properly, the company may get to deal with a heavy penalty. This affects the smooth functioning of the company vigorously.

Social disadvantages: Joint Stock Company has certain social disadvantages such as monopolistic tendencies, wasteful expenditure, wastage of resources, pollution of air, water and environment etc which are not only harmful for the organization but also for the society.

Despite having several disadvantages or limitations, still, Joint Stock Company is considered better than other busmen forms. Also, many of these disadvantages can be avoided through conscious efforts.