A joint stock company is a distinct type
of business organisation evolved to overcome the limitations of sole trader and
partnership concerns. The advancement in science and technology and the impact
of industrial revolution have all necessitated a large amount of capital
investment and highly sophisticated managerial skill for running a large-scale
industry. Partnership with limitations of its capital and managerial ability
and with the added risk of unlimited liability has been found unsuitable for
running a large-scale industry in modern times. Therefore joint stock company
form of organisation came into existence.
The joint stock companies in India are
governed by The Companies Act 2013 (earlier one was, The Companies Act 1956).
The new Act has been divided into 29 chapters with 470 sections.
The Act came into force on 12 September
2013 with few changes like earlier private companies maximum number of members
was 50 and now it will be 200. A new class of company is of “One
Person Company” is included in
this Act that will be a private limited company.
“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 there from.”
“A company is an artificial person
created by law having a separate entity with a perpetual succession and a
- Sec 2 of Companies Act 2013
A company as an entity has many distinct
features which together make it a unique organization. The essential
characteristics of a company are as follows:
Under Incorporationa company becomes a
separate legal entity as compared to its members. The company is distinct and
different from its members. It has its own seal and its own name, its assets
and liabilities are separate and distinct from those of its members. It is
capable of owning property, incurring debt, and borrowing money, employing
people, having a bank account, entering into contracts and suing and being sued
separately. In short, it is considered as an artificial person created by law.
The liability of the members of the
company is limited to contribution to the assets of the company upto the face
value of shares held by him. A member is liable to pay only the uncalled money
due on shares held by him. If the assets of the company are not sufficient to
pay liabilities, the personal properties of the shareholders are not held
A company does not cease to exist unless
it is specifically wound up or the task for which it was formed has been
completed. Membership of a company may keep on changing from time to time but
that does not affect life of the company. A company is created by law and it
can be windup only through legal process.
A company is a distinct legal entity. A
member cannot claim to be owner of the company’s property during the existence
of the company.
When a member transfers his shares to another person, the transferee steps into
the shoes of the transferor and acquires all the rights of the transferor in
respect of those shares. There are
restrictions in the transferability of shares in case of private
A company is an artificial person and
does not have a physical presence. Thus, it acts through its Board of Directors
for carrying out its activities and entering into various agreements. Such
contracts must be under the seal of the company. The common seal is the
official signature ofthe company. The name ofthe company must be engraved on
the common seal. Any document not bearing the seal of the company may not be
accepted as authentic and may not have any legal force.
A company can sue or be sued in its own
name as distinct from its members.
A company is administered and managed by
its managerial personnel i.e. the Board of Directors. The shareholders are
simply the holders of the shares in the company and need not necessarily the
managers of the company.
The principle of voting in a company is
one share-one vote i.e. if a person has 10 shares, he has 10 votes in the
company. This is in direct distinction to the voting principle of a
co-operative society where the “One Member - One Vote” principle applies i.e.
irrespective of the number of shares held, one member has only one vote.
A joint stock company has many
advantages. These are given below:
A company can secure large capital
compared to a sole trader or partnership. Large amount of capital is necessary
for conducting business on a large scale. For e.g. Reliance has invested more
than Rs. 25,000 crore in its
telecom venture. Raising such huge amount of funds would be utter impossible in
a sole- tradership or partnership.
The liability of a shareholder is
limited. In the case of a company limited by guarantee, his liability is
restricted to the amount that he has guaranteed to contribute in the event of
winding up of the company.
Transaction of Shares between two
individuals is easy. So there is liquidity of investment. Any shareholder can
easily convert his shares into money by selling his shares.
A company has perpetual or continuous
existence. Members may go or new members may come in, but the company continues
to exist. This ensures continuity in operations and the company can undertake
long term investments.
Joint stock company system encourages
people to save. Even small amount can be used for the purchase of shares. A
person can buy even one share of a company.
The loss of the company is distributed
over a large number of shareholders. So each shareholder bears a
very little amount of loss. Hence the company form of organization has risk
A joint stock company can undertake business on large scale. As a result it can derive all the advantages of large scale production. For e.g. Hero Moto Corp Ltd. 2015, the world’s largest seller of two-wheelers, manufactures motorbikes on a large scale and is able to enjoy cost efficiency.
Joint stock company system has been
responsible for the rapid growth of industries and trade in many countries.
Since Joint Stock Companies have large financial resources, they are able to undertake
large scale production, satisfy the needs of more number of consumers, create
large scale employment opportunities, promote balanced regional development and
contribute substantially to the government by way of taxes.
The following are the disadvantages of
company form of organization
of legal formalities
must be observed in the formation
of the company. To observe these legal formalities, promoters have to spend
much time and money.
The directors manage the company with
the help of paid officers. If the directors are dishonest, they may make personal gain at the expense of the
company. They may misuse their power and position.
A few rich persons may secure control
over the affairs of the company. Thus, the management of a joint stock company
might become oligarchic in character. (Oligarchy means a small group of people
A few individuals may corner the shares
to gain control over the company.
The officers of the company do not have
incentive to work hard. They are not usually inclined to take risks. They lack
In sole trading business personal
supervision is possible. But in company form of organization there is lack of
personal contact between owners and workers. As a result, there is scope for
more industrial disputes in a company form of organization.
Joint stock companies have to pay tax at
higher rates compared to other forms of organizations.