Advantages and Disadvantages of Corporate Enterprises

Advantages of Corporate Enterprises

In modem days, the company form of organization is acquiring more and more importance. This is due to the various advantages that are not available in other forms of organizations like sole tradership and partnership. The principal merits of a corporate enterprise can be summarized as follows:

Advantages and Disadvantages of Corporate Enterprises
Advantages and Disadvantages of Corporate Enterprises

1. Limited Liability

The liability of the members in a corporate enterprise is limited to the face value of the shares held by them. The limited liability of a company is a distinct feature of company business. Therefore, the shareholders cannot be called upon to pay off the debts of the company out of their private funds. The position is altogether different in case of a sole tradership and a partnership.

2. Easy Mobilization of Resources

The maximum number of members is 50 in case of private limited companies. and it is indefinite in case of public companies. The capital is also divided into a number of small parts known as shares. Therefore, even people with limited resources can afford to subscribe for the shares of the company. This results in mobilization of funds easily and economically. This aspect also facilitates large scale operations and its consequent benefits are enjoyed by the shareholders. Almost all the large scale enterprises of the present day are established only in the corporate form.

3. Possibilities for Expansion

Corporate enterprises has the capacity to expand its business in future. This is due to the following reasons:

  • All the benefits of large scale operations are available to the companies.
  • Separation of ownership and control enables the company to hire experienced personnel to run the business.

4. Long Life

The company enjoys legal immortality i.e. it has a long life. Its life is not affected by the death, insanity and insolvency of all its members. The company continues to be in existence irrespective of
the changes in its membership. This feature enables the company to carry on its business without any disturbance.

5. Easy Transferability of Shares

The shares of a company can be transferred from one person to another in the manner provided in the Articles of Association. The consent of other members is unnecessary for a transfer. This characteristic enables the investor to realize his money at any moment by selling the shares in the open market. At the same time, the money is not withdrawn from the company. Hence, it has assured financial stability.

6. Democratic Management

The shareholders are the real owners of the company. They are more in number and are scattered over a wide area. Hence, it is not practicable for all the shareholders to manage the affairs of the company. Therefore, the shareholders elect a few persons amongst them as directors to manage the affairs of the company. All the affairs of the company management (Election of directors, appointment of auditors, approval of accounts, declaration of dividend etc.) are, however, carried on under the control of the shareholders on democratic principles.

7. Capital Formation

Company form of organization is the only suitable devise to stimulate large scale operations with substantial resources. Even people with limited resources can afford to invest their savings in the corporate securities since their face value in general is small. This facilitates mobilization of resources and easy capital formation in the country.

Disadvantages of Corporate Enterprises

The corporate form of enterprise is not an unmixed blessing. It is also subject to certain limitations. Yet the limitations are very few. They can be summed up as follows:

1. Long Drawn Process

The foremost disadvantage lies in complying with the legal formalities. A number of formalities are to be complied with before incorporating a company. Several documents and certificates are to be prepared with the assistance of legal experts. Even after incorporation, the management must be carried on strictly in accordance with the provisions of the Act.

The National Company Law Tribunal exercises excessive control over the dealings of the company. A number of returns have to be filed with the Registrar and every failure is an offense and shall be penalized. A learned writer counts that there are 50 items in respect of which returns have to be filed. Likewise, there are 190 punishable offenses under the Companies Act.

In this context, Mr. Tahir Mohamed, rightly remarked that

Corporate directors wake up in each morning as potential criminals.

A sole trading concern or a partnership firm is comparatively free from all these formalities.

2. Expensive

The incorporation of a company itself is an expensive affair. This is due to the company formalities. Besides, the company has to follow several formalities in every year in complying with these formalities, the company has to incur heavy expenditure which may grab a sizable portion of the profit.

3. Separation of Ownership from Control

Separation of ownership from control, though constitutes a distinct feature of the company form of organization, is itself a handicap. Many companies are run by the directors only for their own benefits and their activities are focused only towards their interest ignoring the interests of the shareholders. They involve in speculative dealings and thereby conceal the actual happenings inside the company. The reports furnished by them to the shareholders also do not represent a true and fair view of the company. Hence, the shareholders are kept in complete darkness.

4. Rigid Government Control

Due to the maladministration of a number of companies by fraudulent directors, the Government has introduced many rigid provisions in the Companies Act so as to exercise rigid control over the affairs of the companies. These provisions, though aimed to safeguard the interest of the shareholders, have become a check while conducting even the routine affairs. Quick decisions have become impossible. All these, in effect, make most of the managements inefficient and ineffective.

5. Erosion of Limited Liability

It is already stated that the limited liability of the members is a distinct feature of company business. But in recent years, both in India and England, company legislation has been directed towards curtailing this privilege of limited liability in certain cases, and the Court can impose unlimited liability on the shareholders, directors or any other person. In other words, the Courts are empowered to lift the corporate veil and impose unlimited liability on the directors and shareholders.

6. Administrative Delays

The Board of Directors are collectively responsible for the administration of the company. This leads to delay in administration. Besides, a number of matters, according to the Companies Act, can be decided only in general meetings. Therefore, a number of meetings are to be conducted to consult the shareholders. This further leads to delay in decision-making.