JOINT
STOCK COMPANY
Features
The definition of a joint stock
company highlights the following features of a company.
(i)
Artificial person: A company is a creation of law and
exists independent of its members. Like natural persons, a company can own
property, incur debts, borrow money, enter into contracts, sue and be sued but
unlike them it cannot breathe, eat, run, talk and so on. It is, therefore,
called an artificial person.
(ii)
Separate legal entity: From the day of its incorporation,
a company acquires an identity, distinct from its members. Its assets and
liabilities are separate from those of its owners. The law does not recognise
the business and owners to be one and the same.
(iii)
Formation: The formation of a company is a
time consuming, expensive and complicated process. Itinvolves the preparation
of several documents and compliance with several legal requirements before it
can start functioning. Registration of a company is compulsory as provided
under the Indian Companies Act, 1956.
(iv)
Perpetual succession: A company being a creation of the
law, can be brought to an end only by law. It will only cease to exist when a
specific procedure for its closure, called winding up, is completed. Members
may comeand members may go, but the company continues to exist.
(v)
Control: The management and control of the affairs of the
company is undertaken by the Board of Directors, which appoints the top
management officials for running the business. The directors hold a position of
immense significance as they are directly accountable to the shareholders for
the working of the company. The shareholders, however, do not have the right to
be involved in the day-to-day running of the business.
(vi)
Liability: The liability of the members is
limited to the extent of the capital contributed by them in a company. The
creditors can use only the assets of the company to settle their claims since
it is the company and not the members that owes the debt. The members can be
asked to contribute to the loss only to the extent of the unpaid amount of
share held by them.
(vii)
Common seal: The company being an artificial
person acts through its Board of Directors. The Board of Directors enters into
an agreement with others by indicating the company’s approval through a common
seal. The common seal is the engraved equivalent of an official signature. Any
agreement which does not have the company seal put on it is not legally binding
on the company.
(viii)
Risk bearing: The risk of losses in a company is
borne by all the share holders. This is unlike the case of sole proprietorship
or partnership firm where one or few persons respectively bear the losses. In
the face of financial difficulties, all shareholders in a company have to
contribute to the debts to the extent of their shares in the company’s capital.
The risk of loss thus gets spread over a large number of shareholders.
Merits
The company form of organisation
offers a multitude of advantages, some of which are discussed below.
(i)
Limited liability: The shareholders are liable to the
extent of the amount unpaid on the shares held by them. Also, only the assets
of the company can be used to settle the debts, leaving the owner’s personal
property free from any charge. This reduces the degree of risk borne by an
investor.
(ii)
Transfer of interest: The ease of transfer of ownership
adds to the advantage of investing in a company as the share of a public
limited company can be sold in the market and as such can be easily converted
into cash in case the need arises. This avoids blockage of investment and
presents the company as a favourable avenue for investment purposes.
(iii)
Perpetual existence: Existence of a company is not
affected by the death, retirement, resignation, insolvency or insanity of its
members as it has a separate entity from its members. A company will continue
to exist even if all the members die. It can be liquidated only as per the
provisions of the Companies Act.
(iv)
Scope for expansion: As compared to the sole
proprietorship and partnership forms of organisation, a company has large
financial resources. Further, capital can be attracted from the public as well
as through loans from banks and financial institutions. Thus there is greater
scope for expansion. The investors are inclined to invest in shares because of
the limited liability, transferable ownership and possibility of high returns
in a company.
(v)
Professional management: A company can afford to pay higher
salaries to specialists and professionals. It can, therefore, employ people who
are experts in their area of specialisations. The scale of operations in a
company leads to division of work. Each department deals with a particular
activity and is headed by an expert. This leads to balanced decision making as
well as greater efficiency in the company’s operations.
Limitations
The major
limitations of a company form of organisation are as follows:
(i)
Complexity in formation: The formation of a company requires
greater time, effort and extensive knowledge of legal requirements and the
procedures involved. As comparedto sole proprietorship and partnership form of
organisations, formation of a company is more complex.
(ii)
Lack of secrecy: The Companies Act requires each
public company to provide from time-to-time a lot of information to the office
of the registrar of companies. Such information is available to the general
public also. It is, therefore, difficult to maintain complete secrecy about the
operations of company.
(iii)
Impersonal work environment: Separation of ownership and
management leads to situations in which there is lack of effort as well as
personal involvement on the part of the officers of a company. The large size
of a company further makes it difficult for the owners and top management to
maintain personal contact with the employees, customers and creditors.
(iv)
Numerous regulations: The functioning of a company is
subject to many legal provisions and compulsions. A company is burdened with
numerous restrictions in respect of aspects including audit, voting, filing of
reports and preparation of documents, and is required to obtain various
certificates from different agencies, viz., registrar, SEBI, etc. This reduces
the freedom of operations of a company and takes away a lot of time, effort and
money.
(v)
Delay in decision making: Companies are democratically
managed through the Board of Directors which is followed by the top management,
middle management and lower level management. Communication as well as approval
of various proposals may cause delays not only in taking decisions but also in
acting upon them.
(vi)
Oligarchic management: In theory, a company is a
democratic institution wherein the Board of Directors are representatives of
the shareholders who are the owners. In practice, however, in most large sized
organisations having a multitude of shareholders; the owners have minimal
influence in terms of controlling or running the business. It is so because the
shareholders are spread all over thecountry and a very small percentage attend
the general meetings. The Board of Directors as such enjoy considerable freedom
in exercising their power which they sometimes use even contrary to the
interests of the shareholders. Dissatisfied shareholders in such a situation
have no option but to sell their shares and exit the company. As the directors
virtually enjoy the rights to take all major decisions, it leads to rule by a
few.
(vii)
Conflict in interests: There may be conflict of interest
amongst variousstakeholders of a company. The employees, for example, may be
interested in higher salaries, consumers desire higher quality products at
lower prices, and the shareholders want higher returns in the form of dividends
and increase in the intrinsic value of their shares. These demands pose
problems in managing the company as it often becomes difficult to satisfy such
diverse interests.
