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.”

The simplest way to describe a joint stock company is that it is a business organisation that is owned
jointly by all its shareholders. All the shareholders own a certain amount of stock in the company,
which is represented by their shares.

Professor Haney defines it as “a voluntary association of persons for profit, having the capital
divided into some transferable shares, and the ownership of such shares is the condition of
membership of the company.” Studying the features of a joint stock company will clarify its
structure.

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 there from.” —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 expressly or as incidental to its very existence.” —Chief justice
Marshall

“A company means a company formed an registered under this Act.”

— 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 for a common purpose.

Features of a Joint Stock Company

1] Artificial Legal Person
A company is a legal entity that has been created by the statues of law. Like a natural person, it can
7or be sued, etc. It has also been granted certain rights by the law which it enjoys through its board
of directors.

However, not all laws/rights/duties apply to a company. It exists only in the law and not in any
physical form. So we call it an artificial legal person.

2] Separate Legal Entity

Unlike a proprietorship or partnership, the legal identity of a company and its members are separate.
As soon as the joint stock company is incorporated it has its own distinct legal identity. So a
member of the company is not liable for the company. And similarly, the company will not depend
on any of its members for any business activities.

3] Incorporation
For a company to be recognized as a separate legal entity and for it to come into existence, it has to
be incorporated. Not registering a joint stock company is not an option. Without incorporation, a
company simply does not exist.

4] Perpetual Succession
The joint stock company is born out of the law, so the only way for the company to end is by the
functioning of law. So the life of a company is in no way related to the life of its members.
Members or shareholders of a company keep changing, but this does not affect the company’s life.

5] Limited Liability
This is one of the major points of difference between a company and a sole
proprietorship and partnership. The liability of the shareholders of a company is limited. The
personal assets of a member cannot be liquidated to repay the debts of a company.

A shareholders liability is limited to the amount of unpaid share capital. If his shares are fully paid
then he has no liability. The amount of debt has no bearing on this. Only the companies assets can
be sold off to repay its own debt. The members cannot be made to pay up.
6] Common Seal
A company is an artificial person. So its day-to-day functions are conducted by the board of
directors. So when a company enters any contract or signs an agreement, the approval is indicated
via a common seal. A common seal is engraved seal with the company’s name on it.

So no document is legally binding on the company until and unless it has a common seal along with
the signatures of the directors.

7] Transferability of Shares
In a joint stock company, the ownership is divided into transferable units known as shares. In case
of a public company the shares can be transferred freely, there are almost no restrictions. And in
a public company, there are some restrictions, but the transfer cannot be prohibited.

Advantages of Joint Stock Company:

1. Larger Capital- The huge capital required by modern enterprises would not be possible under
other forms of organisations like sole individual proprietorship and even in partnership. The joint
stock company by its widespread appeal to investors of all classes can raise adequate resources
of capital required by large-scale enterprise.

2. Limited Liability- Liability of the shareholders of a company is limited to the face value of
the shares they have purchased. It has a stimulating effect on investment. The private property of
shareholder is not attachable to recover the dues of the company.

3. Stability of Existence- The organisation of a company as a separate legal entity gives it a

character of permanence or continuity. As an incorporated body, a company enjoys perpetual
existence.

4. Economies of Scale- Since the company operates on a large scale, it would result in the
realisation of economies in purchases, management, distribution or selling. These economies
would provide goods to the consumer at a cheaper price.

5. Scope for Expansion- As there is no restriction to the maximum number of members in a

public company, expansion of business is easy by issuing new shares and debentures.

6. Public Confidence- Formation and working of companies are well regulated by the provisions
of the Companies Act. The provisions regarding compulsory publication of some documents,
accounts, director’s report, etc., create confidence in public. Their accounts are audited by a
chartered accountant and are to be published. This creates confidence in the public about the
functioning of the company.

7. Transferability of Shares- The shareholders of a public company are entitled to transfer the
shares held by them to others. The shares of most joint stock companies are listed on the stock
exchange and hence can be easily sold.

8. Professional Management- The management of a company vests in the directors duly elected
by shareholders. Normally, experienced persons are elected as directors. Thus, the available skill
is utilized for the benefit of the company. The company organisation, therefore, is like a bridge
between the skill and capital.

9. Tax Benefits- Company pays lower tax on a higher income. This is because of the reason that
the company pays tax on the flat rates. Similarly, company gets some tax concessions if it
establishes itself in a backward area.

10. Risk Diffused- The membership of a company is large. The business risk is divided among
several members of the company. This encourages investment of small investors.

Disadvantages of Joint Stock Company:

1. Difficulty in formation- The legal formalities and procedures required in the formation of a
company are many. It has to approach large number of people for its capital and it cannot
commence business, unless it has obtained a certificate of incorporation and a certificate to
commence business.

2. Lack of Secrecy- Every issue is discussed in the meeting of the board of directors. The
minutes of meeting and accounts of the firm’s profit and loss etc., have to be published. In this
situation maintenance of secrecy is difficult.

3. Delay in Decision Making- In company form of organisation, all important decisions are
taken by the board of directors and shareholders in general meeting. Hence, decision making
process is time consuming. Board of directors itself has often to be at the mercy of bureaucracy.
4. Concentration of Economic Power- The company form of organisation gives scope for
concentration of economic power in a few hands. It gives easy scope for the formation of
combinations which results in monopoly. Large joint stock companies tend to form themselves
into combinations or associations exercising monopolistic power which may prove detrimental to
other firms in the same line or to the consumers.

5. Lack of Personal Interest- In company form of organisation, the day-to-day management is

vested with the salaried persons or executives who do not have any personal interest in the
company. This may lead to reduced employee motivation and result in inefficiency.

6. More Government Restrictions- The internal working of the company is subject to statutory
restrictions regarding meeting, voting, audit, etc. The establishment and running of a company,
therefore, would prove to be troublesome and burdensome because of complicated legal
regulations.

7. Incapable and Unscrupulous Management- Unscrupulous individuals may bring economic

ruin to the community by promoting bogus companies. The fraudulent promoters may be fool the
public to collect capital and misuse it for their personal gain. Misuse of property, goods and
money by the managerial personnel may harm the interests of the shareholders and create panic
among the investing public.

8. Undue Speculation in the Shares of the Company- Illegitimate speculation in the values of
shares of a company listed on the stock exchange is injurious to the interest of shareholders.
Violent fluctuations in the values of shares as a result of gambling on the stock exchange,
weakens the confidence of investors and may lead to financial crisis.