The Joint Stock Company
“A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.”
Introduction :
With the technological improvements, the scale of operations has increased. The requirements for finances and managerial resources have gone up. The traditional forms of organisation such as sole-proprietorship and partnership could not meet the requirements of business. The increase in business volumes also brings in more liabilities. Under these circumstances the company form of organisation developed as the most suitable alternative.
In this form of organisation a large number of persons known as shareholders join hands to start a bigger business and the liability of members is also limited to the extent of shares they have subscribed to. Joint stock company form of organisation was first started in Italy in thirteenth century.
In India the first Companies Act was passed in 1850 and the principle of limited liability was introduced only in 1857. A comprehensive Companies Act was passed in 1956 and all undertakings registered under this Act are known as ‘companies’. The companies started ‘under state or central legislations are called ‘corporations’.
Definitions :
A company is “an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss (as the case may be) arising therefrom.”
-James Stephenson
“A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.”
-Prof. L.H. Haney
“A corporation is an artificial being, invisible, intangible and existing only in contemplation of the law. Being a mere creation of law, it possesses only the properties which the charter of its creation confers upon it either “A company means a company formed an registered under this Act.”
expressly or as incidental to its very existence.”-Chief Justice Marshall
-Section 3 of Indian Companies Act 1956 An analysis of above mentioned definitions brings out the following facts:
1. A company is an artificial person under law.
2. It has separate legal entity than its members.
3. It possesses only those properties which have been conferred on it by the charter of its creation.
4. It is a voluntary association of persons.
5. It is created to earn profits.
6. It has a capital which is contributed by the members.
7. The capital is divided into small parts known as shares.
8. The persons who own these shares are called members.
9. The shares of a company are easily transferable.
10. The capital of a company is employed a common purpose. Characteristics of a Joint Stock Company
The important characteristics of a Joint Stock Company are as follows:
1. Incorporated association :
A company is called an incorporated association because it comes into existence only after registration. Whereas in other forms of business ownership -sole proprietorship and partnership – registration is not compulsory.
2. Minimum Number of Members:
Forming a public company at least 7 persons and for forming a private company at least 2 persons are required. If not registered it would be treated as illegal association.
3. Artificial legal person :
A company is a creation of law and is called an artificial person. It exists only in the contemplation of law, and therefore, has no physical form. However, law grants it the right to act as a natural being – through a board of directors elected by the shareholders.
4. Distinct legal entity:
A company is regarded as an entity separate from its members because a shareholder of a company (i) in his individual capacity cannot bind the company in any way. (ii) Can enter into contract with the company and can be an employee of the company. (iii) cannot be held liable for the acts of the company even if he holds the entire share capital.
Likewise, the company has (i) the right to own the property in any way it likes. (ii) Can sue and be sued in its own name by its members as well as outsiders, (iii) life of the company is independent of the life of its members. The principle of separate legal entity of the company has been judicially recognized in several cases; however, the famous case of Salomon Vs. Salomon & Co. Ltd. has its distinct importance.
In this case, one Salomon converted his leather business from a sole proprietorship into a company, taking 20000 shares for himself, and allotting one share each to his wife and daughter.
Salomon also received mortgage debentures in part payment by the company for the business. The validity of these debentures was questioned on the ground that a person can not owe to himself and that Salomon and the company were one and the same person. It was, however, decided that Salomon’s own entity was distinct from that of the company in question.
5. Perpetual succession :
A company has unending life quite independent of the life of its members. The death, insolvency, or exit of any shareholder has no effect on the life of a company. “During the war all the members of one private company. while in general meeting, were killed by a bomb.
But the company survived; not even a hydrogen bomb could have destroyed it”. The common saying in this regard is “members may come, members may go, but the company goes on forever”. Law creates it and law alone can dissolve it. However, sole proprietorships and partnerships do not enjoy uninterrupted life. The proprietary business almost comes to an end if anything happens to the proprietor.
Even when it is passed on to the successors, they may not be competent to operate it. Partnership, for instance, comes to an end on the death, lunacy, or insolvency of a partner. A partner can also put an end to partnership by retirement.
6. Common Seals :
Requires that a company must have a common seal with its name engraved on it. Any document bearing the common seal of the company. and signed by two directors, legally binds the company.
7. Transferability of Shares:
The capital of a company is divided into parts, called shares. These shares of the company are transferable. In a public company this right of transfer is absolute. In a private accompany, however, some restrictions on the right of transfer of shares are imposed through its articles.
8. Limited liability :
The liabilities of a shareholder of a company are usually limited. For satisfaction of the debts of the company, the personal property of the shareholder cannot be used. A shareholder’s liability is limited to the amount unpaid on their shares, irrespective of the magnitude of losses suffered. In case of a guarantee company, however, the members are liable to contribute a specified agreed sum in the event of the company being wound-up.
In case of sole proprietorship and partnership the position is different. In sole-proprietorship, the liability of the owner is unlimited, that is, even to the extent of his personal possessions. The nature of partners’ liability is also the same. The liability of partners is both individual and collective. The creditors have a right to recover the firm’s debts from the private property or one or all partners, where firm’s assets are insufficient.
Advantages of a Joint Stock Company
1. One of the biggest drawing factors of a joint stock company is the limited liability of its members. their liability is only limited up to the unpaid amount on their shares. Since their personal wealth is safe, they are encouraged to invest in joint stock companies.
2. The shares of a company are transferable. Also, in the case of a listed public company they can also be sold in the market and be converted to cash. This ease of ownership is an added benefit.
3. Perpetual succession is another advantage of a joint stock company. The death/retirement/insanity/etc does affect the life of a company. The only liquidation under the Companies Act will shut down a company.
4. A company hires a board of directors to run all the activities. Very proficient, talented people are elected to the board and this results in effective and efficient management. Also, a company usually has large resources and this allows them to hire the best talent and professionals. Disadvantages of a Joint Stock Company
1. One disadvantage of a joint stock company is the complex and lengthy procedure for its formation. This can take up to several weeks and is a costly affair as well.
2. According to the Companies Act, 2013 all public companies have to provide their financial records and other related documents to the registrar. These documents are then public documents, which any member of the public can access. This leads to a complete lack of secrecy for the company.
3. And even during its day to day functioning a company has to follow a numerous number of laws, regulations, notifications, etc. It not only takes up time but also reduces the freedom of a company.
4. A company has many stakeholders like the shareholders, the promoters, the board of directors, the employees, the debenture holders etc. All these stakeholders look out for their benefit and it often leads to a conflict of interest.
