Limitations of a Joint Stock Company

Despite its considerable advantages, the joint stock company form also suffers from certain genuine limitations, which is why it is not automatically the best choice for every kind of business.

1. Complex and costly formation. Compared to a sole proprietorship, which can begin trading with almost no formality, forming a company involves several stages — promotion, drafting and filing the Memorandum and Articles of Association, incorporation, and (for a public company) capital subscription — each involving legal documentation, professional fees, and government charges. This makes starting a company both more time-consuming and more expensive than starting a proprietorship or an ordinary partnership.

2. Separation of ownership from management. In a large public company, the shareholders (owners) are usually too numerous and too scattered to take part in day-to-day management, which is instead handled by directors and professional managers. This separation can create what is often called an "agency problem": the managers, who actually control the company's affairs, do not always act purely in the best interests of the shareholders who own it, and monitoring their conduct closely can be difficult for a widely dispersed shareholder base.

3. Delay in decision-making. Because many important decisions require formal approval — by the Board of Directors, or by the members in a general meeting, sometimes by a special resolution — a company generally cannot act as quickly or as flexibly as a sole proprietor, who can decide and act instantly, or even a small partnership firm.

4. Heavy government regulation and disclosure. A company is subject to close and continuous regulation under the Companies Act, 2013 and by regulatory authorities, and must regularly file returns, accounts, and other disclosures with the Registrar of Companies. While this regulation exists to protect shareholders, creditors and the public, it also means a company has far less operational secrecy and far more compliance burden than a proprietorship or a partnership, where such statutory disclosure obligations are minimal. …