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Sunday, 8 October 2017

Demerits of a Joint Stock Company

Disadvantages of Joint Stock Company are as follows-

1. Difficulty in Formation - Formation of a joint stock company, especially public limited company involves a lot of legal procedures. It is time-consuming and expensive too. Registration of joint stock companies is mandatory. Also at the time of formation, certain legal documents like MOA (Memorandum of Association), AOA (Articles of Association) etc.

2. Slow Decision Making - Decision making is slower in case of public limited companies. The company is run by the Board of Directors. The decisions are taken jointly by the Board of Directors. Also in taking certain decisions, they have to seek shareholders approval by calling a meeting of shareholders. This is mandatory as per law. Since there are a lot of people involved in decision making, the process of decision making takes time

3. Low Motivation - The ownership and management of public limited companies are different. The company is run by the Board of Directors who are people appointed by the owners (shareholders). Board of Directors run the business on behalf of the shareholders. It's the Board of Directors who run the company, but profit belongs to all the shareholders of the company. Hence there is no direct relationship between efforts and rewards. (In some other forms of business organizations like sole proprietorship, more efforts lead to more profit  for the owner/s). There is no incentive for the Board of Directors to work hard.

4. Lack of Secrecy - In case of a public limited company, there is lack of secrecy. The companies have to publish their financial details/accounts on a regular basis as per law. They have to send an annual report of the business to all the shareholders every year. This means a lot of information can also be viewed by anyone (including competitors). Certain decisions cannot be taken without the approval of shareholders. This also leads to dilution of business secrecy.

5. Excessive Government Control - There are a lot of rules and regulations that have to be followed while running the business. This consumes a lot of time in certain situations. This also reduces the flexibility in doing the business.    

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