Disadvantages of Joint Stock Company

Disadvantages of Joint stock company

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Disadvantages of a Joint Stock Company

The following are the disadvantages of company form of organization

1. Costly and difficult to form: Number of legal formalities must be observed by the promoters of the company. To observe these legal formalities, promoters have to spend much time and money.

2. Scope for dishonest and unscrupulous management: The directors manage the company with the help of paid officers. If the directors are dishonest, they may make personal gain at the expense of the company. They may misuse their power and position.

3. Management oligarchy: A few rich persons may secure control over the affairs of the company. Thus, the management of a joint stock company might become oligarchic in character.

4. Nepotism: Directors and managing agents may appoint their own relatives as the important officers of the company. Merit may not be given importance.

5. Speculation: A few individuals may corner the shares to gain control over the company.

6. Lack of interest: The officers of the company do not have incentive to work hard. They are not usually inclined to take risks. They lack initiative.

7. Lack of good labor relations: In sole trading, partnership forms of organizations personal supervision is possible. But in company form of organization there is lack of personal contact between owners and workers. As a result, there is scope for more industrial disputes in a company form of organization.

8. High taxation: Joint stock companies have to pay tax at higher rates compared to other forms of organizations.

9. Excessive government controls: A company has to submit many statements and returns to the government. There are many inspections and formalities of submission of records, especially in the case of manufacturing companies. Excessive government control leads to waste of time, money and loss of freedom.

10. Lack of secrecy: Maintaining secrecy is the most difficult part in any Joint Stock Company. Every matter has to be discussed in the board of directors’ meeting or in the annual general meeting of shareholders.

11. Evils of large scale business: The company is a large scale enterprise, so it naturally inherits the demerits of the large scale enterprise. There would be problems in coordination and control. Any failure of a company would affect a large number of shareholders, creditors, suppliers and employees.

12. Delay in decisions: In a Joint Stock Company, there would be many levels of hierarchy. Approval has to be obtained at different levels and different departments before a final decision can be taken. There will be great delay in making decisions. As a result, profitable opportunities may be missed.

13. Social evils: Joint Stock Company system has encouraged the growth of monopolies. In many cases monopolies have exploited consumers, workers and suppliers.