Merits and Limitations of the Company Form of Organisation

Because a company can mobilise capital from thousands of investors and yet limit each investor's risk, it has become the preferred vehicle for large-scale business in India. Understanding its merits and limitations helps a student appreciate why some businesses are companies while others remain proprietorships or partnerships.

Merits

• Limited liability. Shareholders risk only the amount they have invested (or the unpaid amount on partly-paid shares), never their personal property, which encourages wider participation in industry and trade.
• Perpetual succession. The company's existence is unaffected by the death, insolvency or exit of any member, giving it the stability needed for long-term projects.
• Large and diversified capital. A public company can raise very large amounts of capital by selling shares and debentures to the investing public, something a sole trader or a small partnership cannot match.
• Transferability and liquidity. A shareholder in a public company can sell shares on a stock exchange without disturbing the company's operations, which makes investment in shares attractive.
• Professional management. Because ownership and management are separated, a company can employ qualified professional managers rather than depending only on the skills of its owners.
• Scope for growth and expansion. Access to large capital, professional management and legal permanence together give companies the capacity to expand, diversify and take on capital-intensive projects.
• Diffusion of risk. Business risk is spread over a very large number of shareholders instead of being concentrated on one or a few owners.

Limitations

• Difficult and expensive formation. Incorporating a company involves several legal formalities — drafting the Memorandum and Articles of Association, filing documents with the Registrar of Companies, and paying registration fees and stamp duty — which take more time and money than starting a proprietorship or partnership.
• Lack of secrecy. A company must file its financial statements, annual returns and other documents with the Registrar, most of which become available for public inspection; competitors can access information that a proprietor or partnership firm could otherwise keep confidential.
• Separation of ownership and control. Because directors, not shareholders, run the company day to day, there is scope for management to pursue its own interests instead of the interests of the owners — a problem often described as the 'principal-agent' problem.
• Excessive government regulation. Companies are subject to detailed and continuing compliance requirements under the Companies Act, 2013, and under securities, labour and tax laws, which can be burdensome, especially for smaller companies. …