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The Disadvantages of a Joint Stock Company

Updated on January 9, 2015

The Board of Directors may occasionally mislead shareholders and take advantage of the company’s funds in a dishonest and unfair way.

A joint stock company is an entity formed under a type of charter. Its mission is to participate in stock markets with the objective of generating profits for members who receive some ownership interest in these companies related to their level of financial investment. Even though a joint stock company has lots of advantages, such as raising capital, limited liability and large-scale production, there are also disadvantages.

Difficult Formation

The formation and registration of a joint stock company is a difficult, expensive and complicated process because you have to complete a number of legal documents and undertake formalities before a company starts a formal business. This process requires the help of specialists, such as promoters, solicitors, chartered accountants, company secretaries and underwriters.

Delay in Policy Decisions

In most cases, policy decisions are made at board meetings, but some decisions require shareholders’ approval. The company often has to fulfill procedural formalities that are time consuming, and it’s mandatory to send notice of the meeting to all members, so there’s always a delay in policy decisions.

Lack of Flexibility

Compared to other organizations, joint stock companies lack flexibility. This happens because of large-scale operations. Any small change requires permission from the concerned authorities and you must pass necessary resolutions by the same people. There are consequences if the detailed procedures aren’t followed appropriately.

Lack of Secrecy

In a company, it’s not possible to keep secrets about business operations because it’s compulsory for the company to publish annual accounts and balance sheets, such as Auditor and Director reports.

Conflicts of Interest

Conflicts of interest among different groups in a joint stock company, such as management, workers, shareholders and directors, can become apparent. These conflicts of interest can affect the company and everyone involved.

Not Suitable for All Types of Business

A joint stock company is not appropriate for businesses where decisions must be made quickly. Businesses that depend on quick decisions and changes cannot function as a joint stock company because this form of organization requires personalized services.

Lack of Contact with Customers and Employees

Because of large-scale operations, it’s very difficult for the company to keep in direct contact with its customers, leading to poor sales promotions. There can also be lack of contact between supervisors and employees, causing a lack of initiative among them. As a consequence, there can be disagreements and disputes that can affect employees’ morale.

Exploitation of Shareholders

The Board of Directors may occasionally mislead shareholders and take advantage of the company’s funds in a dishonest and unfair way. Furthermore, the directors may even stealthily control trading in the stock exchange. Therefore, shareholders are likely to be exploited by corrupt directors.

References

  • JRank Law Library: Joint Stock Company - http://law.jrank.org/pages/7850/Joint-Stock-Company.html
  • Federal Joint Stock Company Laws: What is Joint Stock Company? -http://www.fipc.ru/fipctest/law_jsc.html
  • Law Library--American Law & Legal Information: Joint Stock Company - http://law.jrank.org/pages/7850/Joint-Stock-Company.html

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