Joint Stock Company: Meaning, Features, Advantage and Disadvantage

9th July 2020 1 By indiafreenotes

A joint stock company is a voluntary association formed for the purpose of carrying on some business. Legally, it is an artificial person and having a distinctive name and a common seal. Lord Justice Lindley of England has defined joint-stock company as “an association of many persons who contribute money or moneys’ worth to a common stock and employ it for a common purpose.

The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.”

The term “joint stock company” has been defined by the Companies Act in India as a company limited by shares having a permanent paid-up or nominal share capital of fixed amount divided into shares, also of fixed amount held and transferable as stock, and formed on the principle of having in its members only the holders of those shares or stock and other persons.”

The important features of a joint stock company are the following – an artificial person created by law, with a distinctive name, a common seal, a common capital with limited liability, and with a perpetual succession. An analysis of the above definition reveals many distinctive features of joint-stock company, which distinguish it from other forms of business organization.

Features of Joint Stock Company

Some of the distinguishing features of a company are the following:

  1. Separate Legal Entity

A joint stock company has a separate legal existence apart from the persons composing it. It can own property and sue in a court of law. A shareholder being an entity distinct from that of a company can sue the company and be sued by it whereas a partnership organization or a sole proprietor has no such legal existence in the eye of the law, separately from the persons composing it. Hence there can’t be a contract between a partner and the firm whereas there can be a contract between a shareholder and a company.

  1. Perpetuity

A joint-stock company has the characteristic of perpetuity unlike a partnership or a sole trading concern. Once, a company is formed, it continues for an unlimited period until it is formally liquidated. The maxim “men may come and men go but I go on forever” applies in the case of the company. But a sole trading concern comes to an end with the death of a sole trader, and in the case of partnership, death, retirement, or insolvency of any member of the partnership would dissolve the firm.

  1. Limited Liability

In the case of joint-stock company the liability of members is normally limited by guarantee or by the shares he has taken. If a member has already paid the complete amount due on his shares, he is not further liable towards the debts of the company. But in the case of sole proprietorship and partnership, the liability is unlimited and in the case of the latter, it is also both joint and several.

  1. Number of Members

In the case of public limited company the maximum number of members is unlimited, the minimum being seven. In the case of a private limited company, the maximum is two. But the number of partners in a partnership cannot exceed ten in the case of business and twenty in other lines of business.

  1. Separation of Ownership from Management

In the case of partnership, partners are not only the owners of the business but they take part its management also. Every member of a partnership firm is an agent of the firm and also of the other members. In the case of joint-stock company, the shareholders are the owners while the management is entrusted to a board of directors, who are separate from shareholders.

Further, the shareholders are not the agents of the company and a shareholder cannot bind them by his acts.

  1. Transferability of Shares

The shareholder of a company can transfer his shares to others without consulting other shareholders, whereas in a partnership a partner cannot transfer his share without the consent of all the other partners.

  1. Rigidity of Objects

In the case of partnership, the scope of its business can be changed at any time with the consent of all the partners, whereas a joint stock company cannot do any business not already included in the object clause of the Memorandum of Association of the company. A change in the object clause under condition laid down in the Companies Act is essential for making any alteration in the scope of the business.

  1. Financial Resources

On account of liability and diffusion of ownership in joint company organization, there is a great scope for mobilizing a large capital. But in the case of partnership or sole proprietorship, because of the limited number of members, the resources at their command are limited.

  1. Statutory Regulation

A company has to comply with numerous and varied statutory requirements. It has to submit a number of returns to the government, whereas partnership and sole proprietorship are free from much State control and statutory regulations. Further in the case of the company, accounts must be audited by a charted accountant but it is not compulsory in the case of partnership and sole proprietorship.

Advantages of Joint Stock Company

The joint stock company type of organization has become very popular throughout the world because of many advantages.

Some of the advantages are as follows:

  1. Financial Strength

The joint stock company can raise a large amount of capital by issuing shares and debentures to the public. There is no limit to the number of shareholders in a company. (However, in a private company the membership cannot exceed 50.) The capital of the company is divided into numerous parts of small value called shares and this attracts even the person with limited resources.

Further, anyone can purchase the shares and leave the responsibility of management to the body of persons called directors. Again, as the shares are freely transferred by selling it in the stock market, this works as an added attraction to the investors. Because of this, the joint stock form of organization is well adopted for raising amounts of capital.

  1. Limited Liability

One important factor which attracts the investors to subscribe is the principle of limited liability. According to this a shareholder’s liability is limited only to the extent of the face value of the shares held by him and his personal properties are not affected. This form of organization is a great attraction to persons who do not want to take much risk in other forms of organization that do not enjoy the benefit of limited liability.

  1. Benefits of Large Scale Organization

As the size of a company is large, the economies of large-scale organization and production are secured. Due to this, the cost of production will be less and the society is in a position to get its requirements at a lesser price.

  1. Scope for Expansion

As there is no limit to the number of persons in a company, there is a great scope for expansion of the business. A company, which is making good profits, can create big reserves which can be used for the expansion of the company. In addition, the availability of managerial talent in the company facilitates the expansion of the business.

  1. Stability

A company is a legal entity and enjoys perpetual succession which means the retirement or death of a shareholder cannot affect the company Even the change in the management or the owner or disputes over the ownership of shares or stock cannot affect the continuity of a company. The companies are well suited for business, which require a long period to establish and consolidate.

  1. Transferability of Shares

One special feature of company is that shares are freely transferable from one person to another without the knowledge of the shareholders. The existence of stock exchanges where shares and debentures are sold and purchased has facilitated as good as cash as they can be sold at any time and there is an added attraction to the investors.

  1. Efficient Management

In company organizations, the agents of production are effectively combined and also there is scope for increased efficiency of direction and management. The most efficient persons may be chosen as directors and if found indifferent, they may be changed in the next meeting. Normally, as the directors have a great stake in the business, in the interest of the company, and in their own interest, they have to be very efficient.

  1. Higher Profit

As a large capital is invested in companies, it would be possible for them to use the expensive machinery and up-to-date equipment resulting in greater production, reduced cost, and higher profit. The progress of industries and commerce of the nation.

  1. Diffused Risk

In this form of organization, the risk is reduced for each shareholder, because it is diffused and spread over several shareholders of the company. This is an advantage from the individual investor’s point of view.

  1. Bolder Management

In this form of organization, as the persons who manage the company have relatively smaller financial stake, they can become adventurous. There are many industries, which would not have come into existence if people had been unduly cautious.

Starting of a new enterprise needs an adventurous spirit and in case of joint-stock company because of its limited liability and smaller financial stake of the persons, who manage it, people can become adventurous and thus start new enterprises.

  1. Social Benefit

The company form of organization has encouraged the habit of saving and investment among the public. It has also indirectly helped the growth of financial institutions such as banks and insurance companies by providing avenues to invest their funds. Further, as companies cannot be managed by all the shareholders who are large in number, it has to employ professional managerial personnel and this has helped the development of management as a profession.

Again, as the affairs of the company are published, and as the companies are well regulated and controlled by the State, the public has great confidence in the company form of organization.

Disadvantages of Joint-Stock Company

In spite of so many advantages of company form of organization, there are many drawbacks and limitations from which it suffers.

They are as follows:

  1. Formation is Difficult

The formation of a company involves a long-drawn-out complex procedure. For formation many provisions of the Companies Act are be complied with. Large amount of money have to be spent in order to fulfill the preliminaries. Further, in many cases government sanction is required. These difficulties discourage many persons from starting companies.

  1. Fraudulent Management

Many a time unscrupulous promoters by presenting the prospectus as a rosy picture manage to get capital from the public. This results in companies being started and managed by incapable and fraudulent hands.

  1. Concentration of Control in Few Hands

In theory, democratic principles are followed in the management of companies, but in practice it is nothing but oligarchy of managing director and directors leading to concentration of control in a few hands. The shareholders have no say in the affairs of the company.

As they are spread throughout the country, very few care to attend the meetings and those who do not attend, normally give proxies in favor of managing director or directors. All these facilitate the concentration of economic power in the hands of a few persons.

  1. Encourages Speculation

This form of organization encourages speculation on the stock exchange. Usually the value of the company’s share depends on the dividends declared and reputation of the company, which can be manipulated. This may encourage the managing director and directors to manipulate the shares on the stock exchange in their own interest to the detriment of the majority of shareholders.

  1. Lacks Initiative and Motivation

As there is indirect delegated management in the company form of organization, there is no initiative and motivation. The paid officials who manage the company have no personal interest and this leads to inefficiency and waste.

  1. Conflict of Interest

There is a conflict of interest between persons who are at the helm of affairs of company and shareholders. Many times dishonest persons at the top succeed in cleverly misleading and cheating the shareholders. Again there is a clash of interest between the shareholders.

Again there is a clash of interest between the preference shareholders and equity shareholders. While the preference shareholders want the creation of large reserves out of profits, the equity shareholders are interested in distributing the entire profit by way of dividends.

  1. Excessive Government Control

A company form of organization is very much controlled by the government and it has to observe many provisions of the different regulations of the government. Again, heavy penalty is imposed for the non-observance of the provisions of the Acts. Companies spend much of their precious time in complying with the provisions and the statutory rules.

  1. Lack of Prompt Decision

The prompt decisions which are possible in case of other organizations such as sole-trading organization and partnership are not possible in a company form of organization. Owing to the difficulty of getting the requisite quorum and the presence of diverse interests, which may lead to disagreement, prompt decision cannot be taken.

  1. Monopolistic Control

There is a great possibility for companies to form combination or amalgamate with a view to getting monopolistic control. This is very harmful to the other producers and businessmen in the same line and also to the consumers.

In spite of the disadvantages discussed above, it may be concluded that the advantages considerably outweigh the disadvantages of company form of organization and hence it has become universally popular and well established in the business world. It is particularly suitable for those lines of business, which requires huge capital and maximum stability.