Joint Stock Companies: Their Advantages And Disadvantages

Definition, Features, Advantagaes and Disadvantages

Joint-stock companies, also known as corporations, are a type of business entity where shares can be purchased or sold. Joint-stock companies are perhaps the most widely used type of business organization. The United States calls a company whose shares are traded on the stock market a publicly held company. Other countries may refer to this form of business organization as a public limited company.

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In corporations with publicly traded shares, shareholders only have limited liability: they cannot be held personally responsible for the debts and liabilities of the corporation. Shareholders will never be required to cover the entire debt if one of these companies becomes bankrupt while owing certain stakeholders (creditors). As a result, the shareholders will only lose the amount invested in the company. Assets of the company can be used to pay off creditors. A shareholder who contributes more than $250,000 to the assets of a publicly traded corporation is protected from personal liability under U.S. law (the same applies to partners in limited partnerships).

  • Advantages of Joint Stock Company
  • Disadvantages of Joint Stock Company
  • Comparison Table for Advantages and Disadvantages of Joint Stock Company
  • Conclusion on Joint Stock Company – Advantages And Disadvantages
  • FAQs on Advantages And Disadvantages of Joint Stock Company

Advantages of Joint Stock Company

Joint stock companies allow for the participation of more than one investor. As a result, the company has many sources to invest in, which can make it more stable and secure. Shareholders have a vote on decisions made by the Board of Directors, so they can influence company operations. Joint stock companies have several other advantages:

  • Larger Capital – With a joint-stock company, the capital of the company is divided up and sold to shareholders. This means that there is no limit on how much money can be raised. Unlike a corporation, there are also no restrictions on who can buy shares in the company.
  • Limited Liability – With a joint-stock company, the shareholders have limited liability. The protection and responsibility of the company are divided between its shareholders. This means that if the company goes bankrupt and it can’t pay off its debts, the shareholders are responsible for paying back only what they invested. Hence, they will not lose their personal assets like their home or car.
  • Economies of Scale – Economies of scale refers to the cost advantages that a large company has over smaller companies. The larger the production, the lower the per-unit-cost will be. A joint stock company offers economies of scale to their shareholders. One of the main benefits is that it can provide a steady stream of capital for businesses with large investment requirements. The smoothing in the volatility of earnings, and the larger pool of shareholders also help to reduce risk for each shareholder.
  • Scope for Growth and Expansion – Joint stock companies have the potential for growth and expansion that is not available to other types of corporations. People can purchase shares in a joint stock company with the expectation that the company will grow over time and make significant profits. The corporation’s board of directors decides how much emphasis to put on growth, what sectors to expand into, where to invest, etc.
  • Increased Public Confidence – A Joint Stock Company will have a board of directors who are responsible for the company and its shareholders. They must make decisions that benefit shareholders and not just ones that benefit themselves. There is a lower risk of fraud because records are more transparent and it is easier to prosecute crimes in this system.
  • Tax Benefits – When a company is organised as a joint stock company, the shares of stock aren’t taxed until they are sold. This type of organisation also needs less paperwork and is easier to enter into the market because the company’s capital can be divided up among many investors.
  • Increased Accountability – Shareholders now have a stake in the company, which means they will want to know that their investment is being used wisely. They can then vote on decisions, like whether to move the company’s headquarters or divest from a certain product. This increased accountability improves decision-making and makes it easier to assess risks.
  • Easily Adaptable – A joint stock company is a company that can be owned by anyone. This makes it very adaptable as the company doesn’t need to worry about holding a specific type of stake or shares. The shareholders are able to hold as many stocks or shares as they want and can sell them at any time. If a shareholder buys more shares, then their percentage of the ownership increases.

Disadvantages of Joint Stock Company

Though a joint stock company has many advantages, it also has certain disadvantages. Some of the most prominent ones are as follows:

  • Difficult to Form – Joint Stock Companies are difficult to form for a variety of reasons. One reason is that many individuals need to approve the company’s formation. If even one person objects, the company cannot be formed. Moreover, there are a lot of legal issues that also need to be addressed.
  • Lack of Secrecy – The company will have to disclose information about its operations, finances, and other sensitive matters because they are expected to be open and transparent with their shareholders. Another possible disadvantage is that it’s easier for outsiders (or other competitors) to get insider information and privileges as they will have access to certain levels of information.
  • Delays in Decision Making – One of the disadvantages of Joint Stock Company is that decision making is usually delayed. This can be seen in the case when there are people who are not willing to compromise on their ideas and it makes it difficult for them to make decisions. Another disadvantage of Joint Stock Company is that there is a high chance for internal conflict between the board members when interests are not aligned. Lastly, one more disadvantage is that decision making might be blocked by different levels of power within the company.
  • More Government Restrictions and regulations – Joint Stock Companies are very restricted by the government. They can only be formed in certain circumstances and they have to go through a lot of paperwork and regulation before they are even able to operate. They also have to follow the same rules as any other Corporation, with limits on the amount of foreign investment allowed for example.
  • Immoral / Unethical Management – Joint stock companies have numerous disadvantages, but the most notable is how unscrupulous management can control the company. The board of directors sets their own pay, and some managers are even able to take advantage of their employees in order to make more money for themselves. In addition, there are conflicts of interest between executives and shareholders. There is also a high risk of overvaluing company shares because they cannot be sold until they have been issued by the company.
  • Separation between Management and Ownership – Joint stock companies have many disadvantages. One of the major disadvantages is that the owners don’t often have a say in how their company is managed. Instead, a board of directors or other body decides on this for them. Sometimes, this can lead to mistakes being made that could be harmful for the company’s success.

Comparison Table for Advantages and Disadvantages of Joint Stock Company

Following are the advantages and disadvantages of Joint Stock Company:

Advantages

  • Larger Capital
  • Limited Liability
  • Economies of Scale
  • Scope for Growth and Expansion
  • Increased Public Confidence
  • Tax Benefits
  • Increased Accountability
  • Easily Adaptable

Disadvantages

  • Difficult to Form
  • Lack of Secrecy
  • More Government Restrictions and regulations
  • Delays in Decision Making
  • Immoral / Unethical Management
  • Separation between Management and Ownership

Conclusion on Joint Stock Company – Advantages And Disadvantages

A joint stock company is generally regarded as more advantageous than a sole proprietorship since it requires a higher level of capitalization. There is a disadvantage that the company might not be able to generate enough profits to repay investors; therefore, it may be difficult for the company to raise sufficient capital.

FAQ’s on Advantages And Disadvantages of Joint Stock Company

Question 1.

What is a Joint Stock Company?

Answer:

Shares of a joint stock company can be owned by a single shareholder or by many shareholders. Shareholders who own shares in a joint stock company control and manage the company.

Question 2.

What are the advantages and disadvantages of a Joint Stock Company?

Answer:

Joint stock companies are companies that have shares that can be bought and sold. In comparison to other types of companies, these companies have some benefits, such as limited shareholder liability. However, they also have some disadvantages, such as the ability of the board to issue new shares without shareholder consent.

Question 3.

What are the disadvantages of a Joint Stock Company?

Answer:

State-regulated joint stock companies are a type of business arrangement. This is a company with multiple shareholders. Having such an arrangement has the disadvantage that it can be difficult to determine who controls the company and who holds voting rights. Additionally, there are disadvantages associated with transparency, since all information has to be shared with all shareholders.

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