The following are the demerits of the company form of enterprise:
1. Lack of Personal Interest:
In the company arrangement, ownership and management remain separate. That is why; there is a lack of personal interest. Like the sole trading and the partnership, the company is not looked after daily by the owners of business.
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Because of indirect management, directors also do not look after the affairs of the company with that eagerness and interest as is done by the owners of the sole trading and partnership.
2. Difficult of Formation:
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In comparison to sole trading and partnership the formation of a company is very difficult and complex. So many legal formalities are involved in the incorporation of a company.
Even after establishment, there are many a legal and administrative restrictions on accounting and management of the unit.
3. Lack of prompt Decisions:
Important decisions regarding the management of the company are taken in the meetings of the shareholders and directors. Firstly, the convening of meeting itself takes time and even when meeting is called, the quorum is essential.
As a result, it takes longer time to take decisions than it is in the case of sole trader and partnership.
4. Lack of Secrecy:
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The management and control of business rests with so many hands that it becomes impossible to keep the business secrets. From this point of view, the sole trading organization is an ideal.
5. Chances of Fraud by Directors:
All the rights and responsibilities are handed over in the hands of directors. The danger always remains that all directors (together by fraud and cheating) can misuse the funds of the company.
In fact, the money of the company is misused in some way or other by the directors. It may be that they do not indulge in cheating and fraud.
6. Ineffectiveness of the Shareholders:
In theory, company form is democratic but in practice, the fact is different. After electing the Directors, the shareholders i.e. the real owners of company become completely ineffective. Firstly, they are scattered throughout the country and it is not possible for them to come together with a plan.
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Secondly, individually every shareholder, finding himself to be insignificant. They simply interested in the dividend of the company and have interest in its management.
7. Stringent Regulation:
A company is deviation in the legal rules at very step. In case of any deviation in the observation of these rules, the manager becomes liable for the same.
This restricts the free activities of the managers. They always look for the limitations of the law and they only plan their course of action. This is not seen either in sole trader or in partnership form of business.
8. Conflict of Interests:
In company we find conflict of interests the interests of the preferential shareholders and those of the debenture-holders are served by keeping the profit more and more undistributed. Because they have a definite share in it and again their share accumulates also contrary to this, the ordinary shareholders want that the company should distribute all the profit in the form of dividends.
Again because of the number of employees being large and lack of direct contract between the manager and employees, the possibilities of industrial disputes increase.
9. Encouragement of Speculation:
All the money of the company remains in the hands of the directors. This encourages speculation. If the directors of the company dishonestly invest in speculation, then, in case of losses, the existence of company is in danger and if speculation results in profit it goes into the pockets of the directors.
The facility of open sale and purchase of the shares encourages speculation.
10. Grouping the Power:
This is the true in case of management of almost all companies that it is in the hands of a particular group. Taking advantage of management by majority, certain persons form a group and acquire controlling shares, so that their control on the company might always remain intact.
In some cases, by investing half of the amount of capital and, in some other cases, by investing even less, this group always maintains control over the company. By doing so these groups secure undue advantages.