Demerits of Company Form of Organisation
1. Difficulty of Formation- Promotion of a company business is to be decided first. A number of persons should company promotion. The suitability of a particular type of be ready to associate for getting a company incorporated. A lot of legal formalities are required to be performed at the time of registration. The shares will have to be sold during the particular time. Promotion of a company is both expensive and risky.
2. Separation of Ownership and Management-The
ownership and management of a public company is in different hands. The owners i.e., shareholders play an insignificant role in the working of the company. On the other hand control is in the hands of those who have no stakes in the company The management may indulge in speculative business activities. There is no direct relationship between efforts and rewards. The profits of the company belong to shareholders and the Board of Directors are paid only a commission. The management docs not take personal interest in the workingnof the company as is the case in partnership and sole-trade business.
3. Evils of Factory System- The company form of organisation leads to large-scale production. The evils of factory system like insanitation, air pollution, congestion of cities are attributed to joint stock companies. Joint stock companies facilitate formulation of business combinations which ultimately leads to the monopolistic control and exploitation of consumers.
4. Speculation in Shares- The joint stock companies facilitate speculation in the shares at stock exchanges. The prices of shares depend upon both economic and non-economic factors. The speculators try to fluctuate the prices of shares according to their suitability. The stock exchanges will not help the growth of healthy investment when speculative activities are being carried on. The management of Joint stock companies also sometimes encourage speculation in shares for their personal gains.
5: Fraudulent Management- The promoters and directors may indulge in fraudulent practices. The management is in the hands of those persons who have not invested much in the company. The Company Law has devised methods to check fraudulent practices but they have not proved enough to cheek them completely.
6. Lack of Secrecy- The management of companies remains in the hands of many persons. Everything is discussed in the meetings of Board of Directors. The trade secrets cannot be maintained. In case of sole trade and parthership concerns such secrecy is possible because a few persons are involved in management.
7. Delay in Decision-making- In company form of orsingle individual can make a policy decision.
ganisation no All important decisions are taken either by the Board of Directors or arc referred to general house. Decision-taking process is time consuming. If some business opportunity arises
and a quick decision is needed, it will not be possible to arrange meetings all of a sudden. So many opportunities may be lost because of a delay in decision-making.
8. Concentration of Economic Power- The company form of organisation has helped concentration of economic power in a few hands. Some persons become directors in a
number of companies and try to formulate policies which promote their own interests. The shares of a number of companies are purchased to create subsidiary companies. Interlocking of directionship and establishment of subsidiary companies have facilitated concentration of economic power in the hands of a few business houses.
9. Excessive State Regulations- A large number of
rules and regulations are framed for the working of the companies. The companies will have to follow rules even for their internal working. The government tries to regulate the working of the companies because large public money is involved.
The formalities are many and the penalties for their non-compliance are heavy. This often detracts companies from their main objectives for which they have been formed.