Explain the advantages and disadvantages of a joint stock company as a form of business organization.

Answer Details

A joint stock company is an incorporated business owned by shareholders who contribute capital by buying shares and enjoy limited liability. It has a separate legal personality from its owners.

Advantages:

• Limited liability: a shareholder can lose only the amount invested; personal assets are protected.
• Large capital: selling shares to many people (and, for public companies, to the general public) raises far more capital than a sole trader or partnership can.
• Continuity (perpetual succession): the company continues to exist despite the death, retirement or withdrawal of any shareholder.
• Transferability of shares: shares, especially in a public company, can be sold easily on the stock exchange.
• Specialised management: the company can employ expert directors and managers, improving efficiency.
• Economies of scale arising from large-scale operation lower average costs.

Disadvantages:

• Difficult and costly formation: legal formalities such as registration, memorandum and articles of association make it expensive to set up.
• Separation of ownership from control: shareholders own the firm but managers run it, which can lead to decisions not in owners' interests.
• Lack of secrecy: published accounts reveal information to competitors.
• Double taxation and heavy regulation: company profits and dividends may both be taxed and the firm faces strict legal controls.
• Slow decision-making because of the large size and bureaucratic structure.
• Possible conflict of interest among directors, managers and shareholders.