Tuesday, 21 June 2011

What Is Joint Stock Company?

What Is Joint Stock Company?

The growing needs of business cannot be satisfied with sole proprietorship and partnership. There is a need of some other form of organization to produce the goods on a large scale. Moreover the adoption of innovations of new technology is possible only in large unit. Sole proprietorship and Partnership forms of organization are suitable only for small and medium scale enterprises. These limitations of Sole proprietorship and Partnership gave birth to another form of organization known as company.


In simple words, in Joint Stock Company capital is contributed by large number of persons known as shareholders. The liability of these shareholders is limited to the extent of their investment in the company.

Meaning and Definition:- An artificial person created by law for some common purpose is known as company. The capital is divisible into parts known as shares. The holders of these shares are known as shareholders. They are the real owners of company.

In the words of Lord Justice Lindley, “By a company is meant an association of many persons who contribute money or money’s worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital which each member is entitled to his share. Shares are always transferable, although right to transfer them is often more or less restricted.”


Characteristics of Joint Stock Company:-

1. Legal Person:- Company is a legal person as it is created by law and has its own identity in the eyes of law. It can sue and be sued in its own name.

2. Separate Entity:- The Company has its own separate entity. It is different from its members. No member of the company can bind the company for the acts done by him and vice-versa.

3. Perpetual Succession:- The continuity of the Company is not affected by the death, insolvency or insanity of its member as in the case of Partnership. The Company is created by law and it can be ended by law only.

4. Transferability of Shares:- There is no restriction on the transferability of shares. The shareholders can transfer their whole or any part of their shares to any person, they like.

5. Common Seal:- A Company is an artificial and legal person and can enter into any contract on its own name. But it has no physical existence, so it cannot sign any document personally. Therefore, it is necessary for every company to have its own common seal which works as signatures.

6. Association of Persons:- A Company is an association of persons. For the incorporation of public company, at least two persons are required and the maximum limit is fifty. In case of public company, at least seven persons are required and there is no upper limit in this regard.

7. Incorporation:- Only after obtaining the certificate of Incorporation from the Registrar of companies, the Company can start its business.

8. Diffused Ownership:- The shareholders are the real owners of the company and they are scattered far and wide throughout the country. Thus, the condition is completely diffused in company from the ownership’s view of point.

9. Limited Liability:- The liability of members of company is limited to the extent of amount invested by them in the company. Their personal properties cannot be taken into account while paying off the debts of the company.

10. Separation of Ownership and Management:- This is one of the main features of the company. Because of diffused ownership of company, the real owners of the company are not in a position to take part in the management of the company. Therefore, they elect the representatives who are entrusted with the task of management.

Advantages of Joint Stock Company:-

1. Continuity:- The continuity and stability of the company is not affected by the death, insolvency and insanity of any of the partners. Therefore, this perpetual succession of the company allows company to undertake the big projects which need long time for their completion.

2. Large Capital:- It is much easy to generate capital in case of companies than in case of sole proprietorship or partnership. The company can anytime subscribe its shares and raise its capital.

3. Limited Liability:- This feature of company encourages more investment in the company as the shareholders are liable to the extent of their investments in the company.

4. Transferability of Shares:- This feature of the company provides liquidity to the funds invested. The shareholders can any time sell their shares for cash in stock exchange.

5. Democratic Set Up:- Elected representatives of shareholders manage and control the working of the company. They are fully accountable to the shareholders of the company. The voting power of the shareholders indirectly controls the policies of the company. There is also a provision for retirement.

6. Diffused Risk:- In public company, the risk of loss is diffused over a large number of persons. It becomes so little that individually, each shareholder does not feel the burden of it.

7. Increase in Efficiency and Effectiveness of Management:- The company employs the services of experts in each department of the organization i.e. production. Marketing, accounting etc. It helps in increasing the efficiency and effectiveness of management.

8. Greater Scope of Expansion:- It is much easy to raise capital in companies. There is direct relation between capital and scope of expansion. Moreover, because of efficient management there is much scope of expansion.

9. Large Membership:- There is no restriction on the maximum number of members a company can have. Larger the membership, larger the capital and lesser the burden of risk on each member individually.

10. Economies of Large Scale:- The efficiency in the companies increases the production and decreases the cost of production, which provides the economies of large scale.

11. Efficient Use of Resources:- The efficient use of resources by the companies is another advantage of the company.

12. Creditability:- The companies are under certain obligations e.g. to publish its annual accounts, to file Memorandum of Association and Article of Association etc. which are helpful in winning the confidence of general public. This increases the borrowing power of the company.

13. Social Advantages:- It benefits the society form various angles such as employment, cheaper goods because of large scale economies, motivation for saving etc.

Disadvantages:-

1. Difficult Incorporation:- The Company has to file Memorandum of Association and Article of Association with the registrar of companies for its incorporation. There are other legal formalities which are needed to be compiled with before its incorporation.

2. Lack of Personal Interest:- The working of the company is organized and managed by the elected representatives of the shareholders. They may not have any personal interest in the business and this may cause great disadvantage.

3. Separation of Ownership from Management:- The shareholders of the company do not have any direct say in the working of the company as they are scattered far and wide throughout the country. The suggestions of the shareholders may remain unheard.

4. Lack of Secrecy:- It is difficult to maintain secrecy in the company form of organization as the company is under certain obligations such as to publish its annual accounts, to file Memorandum and Article of Association etc. Moreover, the lack of personal interest of directors may also cause lack of secrecy.

5. Too many Legal Formalities:- There are too many legal formalities to be compiled with right from the incorporation to the winding up of the company.

6. Slow Decision Making Process:- No one in the company is vested with the final authority to make decisions. There are some decisions which are taken in different general meetings. Lot of time is wasted in convening the meetings and taking decisions.

7. Speculation:- The free transferability of shares increases the speculation sk in the company form of organisation.

8. Possibility of Frauds:- The separation of ownership from management increase the possibility of frauds as the elected directors may form or wind up the company or grab the investments of the innocent shareholders.

9. Domination of Majority:- All the decisions are taken by majority in the company. There are very little provisions which safeguard the interest of minority shareholders.

10. Social Disadvantages:- It has certain social disadvantages such as monopolistic tendencies, wasteful expenditure, wastage of resources, pollution etc.

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