Joint Stock Company

 

Meaning

In a partnership firm we know that the number of partners cannot exceed 20. So there is a limit to the contribution of capital. Secondly, even if the partners could contribute a large amount of capital, they would hesitate to do so considering the risk involved in business and their unlimited liability. Mainly to take care of these two problems, a company form of business organisation came into existence.

A company form of business orgnisation is known as a Joint Stock Company. It is a voluntary association of persons who generally contribute capital to carry on a particular type of business, which is established by law and can be dissolved only by law. Persons who contribute capital become members of the company. This form of business has a legal existence separate from its members, which means even if its members die, the company remains in existence. This form of business organisations generally requires huge capital investment, which is contributed by its members. The total capital of a joint stock company is called share capital and it is divided into a number of units called shares. Thus, every member has some shares in the business depending upon the amount of capital contributed by him. Hence, members are also called shareholders.

The companies in India are governed by the Indian Companies Act, 1956. The Act defines a company as an artificial person created by law, having a separate legal entity, with perpetual succession and a common seal.

 

Characteristics of Joint Stock Company

You are now familiar with the concept of company as a form of business organisation. Let us now study its characteristics.

i. Legal formation

No single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company comes into existence only when it has been registered after completion of all formalities required by the Indian Companies Act, 1956.

ii. Artificial person

Just like an individual, who takes birth, grows, enters into relationships and dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is called an artificial person as its birth, existence and death are regulated by law and it does not possess physical attributes like that of a normal person.

iii. Separate legal entity

Being an artificial person, a joint stock company has its own separate existence independent of its members. It means that a joint stock company can own property, enter into contracts and conduct any lawful business in its own name. It can sue and can be sued by others in the court of law. The shareholders are not the owners of the property owned by the company. Also, the shareholders cannot be held responsible for the acts of the company

iv. Common seal

A joint stock company has a seal, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organisation working on behalf of the company. Any document, on which the company’s seal is put and is duly signed by any official of the company, become binding on the company. For example, a purchase manager may enter into a contract for buying raw materials from a supplier. Once the contract paper is sealed and signed by the purchase manager, it becomes valid. The purchase manager may leave the company thereafter or may be removed from the job or may have taken a wrong decision, yet for all purposes the contract is valid till a new contract is made or the existing contract expires.

v. Perpetual existence

A joint stock company continues to exist as long as it fulfils the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its members. For example, in case of a private limited company having four members, if all of them die in an accident the company will not be closed. It will continue to exist. The shares of the company will be transferred to the legal heirs of the deceased members.

vi. Limited liability

In a joint stock company, the liability of a member is limited to the extent of the value of shares held by him. While repaying debts, for example, if a person owns 1000 shares of Rs. 10 each, then he is liable only upto Rs 10,000 towards payment of debts. That is, even if there is liquidation of the company, the personal property of the shareholder can not be attached and he will lose only his shares worth Rs. 10,000.

vii. Democratic management

Joint stock companies have democratic management and control. That is, even though the shareholders are owners of the company, all of them cannot participate in the management of the company. Normally, the shareholders elect representatives from among themselves known as ‘Directors’ to manage the affairs of the company.

While opting company form of business, the entrepreneur should clearly gone through the distinction between company with partnership form of business. The next step arises a regard to why to go for company form of business. The following points depicts the advantageous points of this form of business.

 

Advantages of Joint Stock Company:

(1) Huge resources:

A company can raise large amount of resources from the genera public by issuing shares. Since, there is no maximum limit of the number of shareholders ii case of public company, fresh shares can be issued to meet the financial requirement. Capita can also be obtained by issuing debentures and accepting public deposits.

(2) Limited liability:

The liability of the shareholders is limited to the extent of the face value of the shares held by them or guarantee given by them. The shareholders are not liable personally for the payment of debt of the company. Thus, limited liability encourages the investors to put their money in the shares of the company.

(3) Transferability of shares:

The shares of the public company are transferable without any restriction. A shareholder can sell his shares at any time to anybody in the stock exchange Therefore, the conservative and cautious investors are also attracted to invest in the shares of public company. This brings liquidity to the investors.

(4) Stability of existence:

A joint stock company enjoys perpetual succession. It continues for a long period of time because it is unaffected by the death, insolvency of the shareholders directors. Change of ownership and management also does not affect the continuity of the business.

(5) Efficient management:

A company can hire the services of professional manager for its functional areas because of its financial strength. The directors who look after the management of the company are generally experienced and persons of business acumen Therefore, the management of a company is sure to be efficient.

(6) Scope for expansion:

A company can generate huge financial resources by issuing shares and debentures to finance new projects. Companies also transfer a portion of their profit to reserve which can be utilised for future expansion. The managerial capabilities a the disposal of a company helps it for planning the future expansion and growth.

(7) Economies of large scale production:

The company is in a position to undertake large scale operation because of its huge financial resources. When the scale of operations i large, the economies in buying, selling, production etc. are enjoyed by the undertaking. The economies of large scale enables the company to produce goods at lower cost and supply the same to the consumers at cheaper prices.

(8) Public confidence:

A company submits required information to the Government and other authorities at regular intervals. The accounts of the company are audited by chartered accountants and also published for the information of the stakeholders and others. This enables a company to enjoy the trust and confidence of the public.

(9) Social benefits:

A joint stock company provides a number of benefits to the society. 1 creates employment opportunity, investment opportunity, utilises the unutilised natural resource of the nation, supplies quality products and services at cheaper rate and generates revenue for the Government and also undertakes many infrastructural developmental programmes in the country.

(9) Diffused risk:

The entire business risk of a company is distributed over a large number of shareholders. Thus, the risk is reduced for each shareholder. No shareholder is burdened with more than what he has paid as the price of shares hold. No personal property will be attached for the same.

(10) Tax benefits:

As a separate entity, companies pay income tax at a flat rate. Because of this, the company’s tax burden on higher income is less in comparison to other forms of business organisation. Companies also avail tax exemptions deductions and concessions for undertaking their operations in specific areas, dealing with nature of goods and services and others.

 

Disadvantages of Joint Stock Company

Despite the above advantages, the company form of organisation also suffers from certain demerits. The following are some of the important demerits of a company which every entrepreneurs should know while going for selection of type of business.

(1) Difficulty in formation:

The formation of a joint stock company is very difficult, time taking and expensive as compared to any other form of organisation. Conceiving the very idea and getting it implemented is very difficult process. Preparation of the basic documents like memorandum of Association and Articles of Association, fulfilling legal formalities as per the Act and getting the business registered needs lot of time, money and expertise.

(2) Oligarchic management:

The management of company is democratic in theory but oligarchic in practice. It is controlled by a small group of Board of Directors who hardly protect the interest of other shareholders. They may manipulate the things with an intention to be re-elected as directors. That is why it is said that shareholders do nothing, know nothing and get nothing.

(2) Delay in decision-making:

The Board of Directors of the company decides about the policies and strategies of the company. Certain decisions are taken by the shareholders. The meeting of the directors or the shareholders cannot be held at any time as and when required. Thus, the decision making process is usually delayed. The delay in decision-making may result in losing some business opportunities.

(3) Separation of ownership and management:

The company is not managed by the shareholders but by the directors who are the elected representatives of the shareholders. The directors and managers may lack the personal initiative and motivation to manage the company efficiently as the shareholders (owners) themselves would.

(4) Lack of secrecy:

Each and every business strategy is discussed in the meeting of the Board of Directors. The annual accounts are published and compliance to Government, Tax authorities etc. are made at regular intervals. Therefore, it is very difficult to maintain business secrecy in a company form of organization in comparison to sole proprietorship and partnership.

(5) Speculation in shares:

When profit is earned by manipulating the prices of shares without actually holding the shares, it is considered as speculation. A company provides scope for speculation and the directors and managers may derive personal benefit out of this. It is harmful to the innocent small shareholders who invest their hard earned money with a view to get higher rate of return.

(6) Fraudulent management:

The possibility of starting a bogus company, collecting huge sums of money and subsequently bringing liquidation of the company is not ruled out. The promoters with an intention to defraud may indulge in such practices. The directors and managers may function for their personal gain overlooking the interest of the company.

(7) Concentration of economic power:

The company form of business gives scope for concentration of economic power in the hands of a few through multiple directorship and creation of subsidiary companies. Some persons are elected as directors in a number of companies. These directors formulate policies of the company which will safeguard and promote their own interest. Majority shares of other companies are purchased to create subsidiary companies.

(8) Excessive Government regulations:

A company functions under too much of regulations of the Government. Reports are to be filed and compliance are made at regular intervals to appropriate authorities failing which penalty is imposed. A considerable time and money of the company is involved in the process of regular compliance.

(9) Evils of Factory system:

Due to large scale operation, the company may give rise to insanitation, pollution, congestion and some social evils like migration from villages to towns, shifting from agriculture to industry etc. They cause instances in the society.

 

 

 

 

Reference

http://en.wikipedia.org/wiki/Joint-stock_company

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http://organizationinnepal.blogspot.in/2010/04/characaterstics-of-joint-stock-company.html

http://www.preservearticles.com/201101183549/advantages-and-disadvantages-of-joint-stock-company.html

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http://studypoints.blogspot.in/2011/06/disadvantages-of-joint-stock-company_8471.html

http://business-finance.blurtit.com/355861/what-are-the-advantages-and-disadvantages-of-joint-stock-company

http://prezi.com/mods-pyatpea/advantages-and-disadvantages-of-public-sector-private-sect/

 

 

 

 

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