Joint Stock Company, Meaning, Features, Advantage and Disadvantage

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 / Characteristics, of Joint Stock Company

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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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

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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

Disadvantages of Joint-Stock Company

1. Difficulty in Formation

Joint-stock company involves several legal and procedural requirements for incorporation. Promoters must prepare various documents, complete registration formalities, arrange capital, and comply with applicable company laws. The formation process can therefore be more complicated and time-consuming than that of a sole proprietorship or partnership. Professional assistance may also be required for legal, accounting, and regulatory matters, increasing the initial cost of establishing the company.

2. High Cost of Formation

The establishment of a joint-stock company generally involves higher formation expenses. Costs may arise from registration, documentation, professional advice, statutory compliance, and other administrative procedures. Large companies may also incur significant expenses in preparing financial and legal documents. These costs can create a burden for small entrepreneurs who have limited financial resources. Consequently, the joint-stock form may not always be economical for businesses operating on a very small scale.

3. Complex Management

Management of a joint-stock company can be complex because ownership is divided among numerous shareholders while management is usually entrusted to directors and professional managers. Coordination between shareholders, the board of directors, executives, and employees may create administrative difficulties. Different groups may have different interests and expectations. Maintaining effective communication and coordination requires proper organizational systems, which can increase managerial costs and make business administration more complicated.

4. Slow Decision-Making

Decision-making in a joint-stock company can sometimes be time-consuming because important matters may require approval through the board of directors or shareholders’ meetings. Formal procedures and consultation may delay responses to changing market conditions. Although such procedures promote accountability and corporate governance, they can reduce flexibility. A company may therefore find it difficult to take immediate action when quick decisions concerning investment, pricing, expansion, or operational changes are required.

5. Separation of Ownership and Management

In a joint-stock company, ownership and management are generally separated. Shareholders own the company, while directors and professional managers are responsible for its administration. Managers may therefore make decisions that do not always fully reflect the interests of individual shareholders. This separation can create an agency problem, where management objectives and shareholder expectations differ. Effective corporate governance, monitoring, disclosure, and accountability mechanisms are required to reduce such conflicts.

6. Lack of Personal Contact

A joint-stock company may have a large number of shareholders, customers, employees, and other stakeholders. Consequently, there may be limited personal contact between owners and management. Ordinary shareholders may not have direct knowledge of daily business operations. This can reduce personal involvement and make it difficult for individual shareholders to influence routine decisions. The large organizational structure may also make communication less direct compared with smaller forms of business organization.

7. Possibility of Speculation

Shares of companies whose securities are publicly traded may be subject to market speculation. Share prices can fluctuate because of changes in business performance, investor expectations, economic conditions, industry developments, and market sentiment. Excessive speculation can create uncertainty for shareholders and may cause substantial differences between market price and the underlying financial performance of a company. This characteristic can make investment in shares more sensitive to changing market conditions.

8. Extensive Government Regulation

Joint-stock companies are subject to various legal, regulatory, accounting, taxation, and disclosure requirements. Companies must maintain records, prepare financial statements, conduct prescribed meetings, file statutory documents, and comply with applicable corporate regulations. While these requirements promote transparency and accountability, they can increase administrative workload and compliance costs. Failure to meet statutory obligations may result in penalties or other legal consequences, making continuous compliance an important responsibility for the company.