Explain the advantages and disadvantages of a Joint Stock Company.

Advantages (Merits) of a Joint Stock Company

1. Large Capital Resources — A public company can have an unlimited number of members and sell shares to them. The credit-standing of a company is also high. Different types of securities can be issued to mobilise funds from different kinds of investors. Therefore, a company can accumulate huge amount of capital for large-scale enterprises.

2. Limited Liability — The liability of a member of a company is limited to the face value of shares held by him. His personal property cannot be attached even if the company is unable to meet its creditors' claims. The risk is known and restricted and is diffused among a large number of persons. This encourages people to invest money in a company.

3. Continuity of Existence — A joint stock company enjoys uninterrupted existence over a long period of time. As a company has a separate legal entity, death or insolvency of its members does not threaten its existence. Ownership of a company may change without affecting the continuity of operations.

4. Efficient Management — A company can employ highly qualified experts in different areas of business management. The combined judgement and experience of several directors facilitate balanced and rational decisions. Centralised management permits unity of action and continuity of policy.

5. Transferability of Shares — The shares of a public company are listed on the stock exchange so that a member can easily sell his shares. He is not bound to keep them for life. Such liquidity of investment stimulates investment in industrial and commercial enterprises.

6. Economies of Scale — The company form of business organisation provides tremendous scope for growth and expansion. Large capital and professional management facilitate large-scale operations. Therefore, a company can fully secure the advantages of economies of large scale in production, marketing, finance and other areas of business.

7. Democratic Management — The membership of a public company is large and its ownership is generally diffused. Management is vested in the Board of Directors elected by the members. Directors are responsible and accountable to the general body of members. The Companies Act, 2013 has laid down several restrictions on the powers of the directors. This prevents oppression and mismanagement in a company and ensures that it is managed on democratic principles.

8. Goodwill and Public Confidence — A company enjoys a good reputation and prestige in the business world. It should disclose its results and follow all legal regulations to win public goodwill. A company's activities are subject to scrutiny by auditors and the government. It enjoys public confidence.

Disadvantages (Demerits) of a Joint Stock Company

1. Legal Formalities — Formation of a company is a time-consuming and expensive process. Too many legal formalities have to be observed and several legal documents have to be prepared and filed. Delay in formation may deprive the business of the momentum of an early start.

2. Lack of Motivation — The directors and other officers of a company have little personal involvement in the efficient management of a company. Divorce between ownership and control and absence of a direct link between effort and reward lead to lack of personal interest and incentive. It is difficult to keep personal touch with customers and employees.

3. Delay in Decisions — Red tape and bureaucracy do not permit quick decisions and prompt action. There is little scope for personal initiative and a sense of responsibility. Paid employees like to play safe and tend to shift responsibility. There is lack of flexibility of operations in a company.

4. Corrupt Management — In a company, there is often the danger of fraud and misuse of property by dishonest management. Bogus companies may be formed to deprive the investors of their hard-earned money. Unscrupulous people may manipulate annual accounts to show artificial profits or losses for their personal gain. The South Sea Bubble case is the most famous example of how corrupt officeholders may exploit shareholders for selfish gain.

5. Excessive Government Control — At every stage in the management of a company, there are legal rules and regulations. Several legal provisions have to be followed and reports have to be filed. Such legal interference in day-to-day operations results in inflexibility of operations. A lot of time and money are spent in complying with statutory requirements.

6. Unhealthy Speculation — The shares of a public company are dealt in on a stock exchange. The prices of these shares fluctuate depending upon the financial health, dividends, future prospects and reputation of the company. Directors may manipulate annual accounts to make illegal gains through speculation in the company's shares. Violent fluctuations in share prices caused by unhealthy speculation reduce investors' confidence and lead to a financial crisis.

7. Conflict of Interests — There is a possibility of conflicts between various groups, e.g., shareholders, debenture holders, directors, etc. Such conflicts reduce employee morale and efficiency of operations.

8. Lack of Secrecy — A public company is required to publish and file its accounts. Therefore, it is very difficult to maintain business secrets in a public company.