Joint Stock Company – Merits and Demerits

Joint Stock company

A Joint Stock company is formed to gain profits by a group of people under the act in which capital is not transferable and the shareholders carry limited liabilities. Any individual can file a case against a company and vice-versa. A company carries an under which it runs; its business and its entity is permanent.


Section 2 (20) of the Companies Act, 2013 defines a Company very precisely as follows

Company méans a Company incorporated under this Act or under any previous Company Law.

According to Prof. Haney

A joint-stock company is an artificial person created by law having a separate entity with a perpetual succession and a common seal.

Merits and Importance of a Joint Stock Company

  1. Higher Capital

    Due to, no limit on the maximum number of members in a company, a huge amount of capital is accumulated, which encourages the establishment of big industries. On the contrary, due to the limit on the number of members in a sole proprietor and partnership firms, its capital is also limited.

  2. Benefit of Able and Experienced Experts

    Since companies have higher resources it can easily take the benefit of services of able and experienced experts, whereas a partnership or sole proprietor firm remains deprived of their services.

  3. Advantages of Monopoly

    Due to large scale production, the companies take the Shape of monopolistic concerns, and they start earning all those benefits which a monopolistic concern gets.

  4. Use of Modern Production Methods

    Due to huge capital and large scale production, the company can earn profits by the use of modern equipment and machines.

  5. Benefits of Industrial Research

    In this competitive era, only those industries can run for a longer period which is capable of higher production at a lower cost. Since the company has more resources it can carry out its own research in new fields with the help of experts and can earn profits from its production.

  6. Perpetual Life

    The entry or exit of the shareholders of a company does not affect its life. The life of the company does not end with the death; insanity or insolvency of any shareholder: On the contrary, a partnership firm may dissolve on the death, insanity, or insolvency of a partner.

  7. Facility of Share Transfer

    There is no restriction on the transfer of a company. They can be freely exchanged in a stock exchange. On the contrary, in a partnership firm, no partner can transfer his, benefit without the approval of other partners.

Demerits and Limitations of a Joint Stock Company

  1. Demerits of Large Scale Production

    In large scale production, after a certain limit, the law of diminishing return applies, as a result of which, the cost of production increases anå the business is unable to cope with the competition.

  2. Lack of Secrecy

    According to the Companies Act 2013, a public company has to publish its annual accounts and Sent each important document relating to the company to the registrar. All these documents can be seen by any person after the payment of the prescribed fees.

  3. Difficulty in Formation

    As compared to a partnership firm, several legal formalities have to be completed for the formation of a company, due to which there is a problem in the formation of a company. The registration of a company is also compulsory.

  4. Fraud by Promoters

    Promoters are the founders of a company but they also commit fraud during the promotion of the company. They, earn profits by showing higher preliminary expenses and utilize the company’s resources for their personal gains.

  5. Exploitation of Shareholders

    Since the cöntrol of the company is centralized in the hands of a few persons, they misuse this power and exploit the interests of shareholders. They fix higher, remuneration, and rewards, whereas the same is not a case in the partnership firms.

  6. Demerits of One Man Company

    According to the Companies Act, 2013 a private company should have at least two and a public company should have at least seven members. Sometimes, only a single individual, who is acting as the owner, takes the signatures of-6 more persons on the Memorandum of Association, only to fulfill the legal formality. In this manner, he is able to incorporate the company legally. He himself collects the required capital and other resources and starts the business of the company. But this creates a possibility of losses to the creditors (loan providers to the company).

  7. Area of OperatiOn Limited by the Memorandum

    company is an artificial legal person. Its rights, duties, objectives, and liabilities are determined by its Memorandum of Association, and it cannot surpass it. gut, in the case of sole proprietorship or partnership the area of business activities can be easily changed when required.

  8. Creation of Business Combinations

    To eliminate competition in business and to increase the præs, several companies unite together and form business combinations and exploit the customers after combination.

  9. Promotes Speculation

    Since there is no restriction on the transfer of shares of a company, they can be freely exchanged in a stock exchange, due to which it encourages the tendency of speculation. The company has to suffer losses due to this speculation.

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