Joint Stock Company: Meaning, Features, Merits and Limitations [Business Organisation and Management Notes NEP Syllabus]

A company is an artificial person created by law, having a separate legal entity, with a perpetual succession and a common seal. It is an association of many persons who contribute money or money’s worth to a common stock and employs it for a common purpose. The common stock so contributed is denoted in terms of money and is called 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.

According to The Companies Act’ 2013 – “Company means every association of person formed and registered under this Act or any companies enacted prior to the Companies Act, 2013.” [sec.2 (20)]

Characteristics of a Company

The system of joint stock organization is very useful for large undertakings for which large capital is required. It is an incorporated association created by law, having distinctive name, a common seal, perpetual succession, limited liability etc. formed to carry on business for profit. Some of the essential characteristics of a company are given below:

1. Artificial Person: A company is an artificial person, which exists only in the eyes of law. The company carries business on its own behalf. It has a right to sue and can be sued, can have its own property and its own bank account. It can also own money and be a creditor.

2. Created by law: A company can be formed only with registration. It has to fulfill a lot of formalities to be registered. It has also to fulfill a lot of legal formalities in order to be dissolved.

3. Separate Legal entity: A company has a separate legal entity and is not affected by changes in its membership.

4. Perpetual succession: A company has a continuous existence. Its existence does not affected by admission, retirement, death or insolvency of its members. The members may come or go but the company may go forever. Only law can terminate its existence

5. Limited Liability: The liability of every member is limited to the amount he has agreed to pay to the company on the shares held by him.

6. Voluntary Association: A company is a voluntary association. It cannot compel any one to become its member or shareholder.

7. Capital Structure: A company has to mention its maximum capital requirements in future in its memorandum of association. Its capital is divided into shares, which are easily transferable from person to person.

8. Transferability of Shares: The shares of the company are movable property. The shares of a company are freely transferable by its members except in case of a private company, which may have certain restrictions of such transferability.

Advantages of Joint Stock Company:

1. Limited Liability: One of the main advantages is that shareholders' liability is limited to the extent of their investment in the company. Personal assets are protected from business debts.

2. Large Capital Base: Joint stock companies can raise substantial capital by issuing shares to a large number of investors. This capital is crucial for expansion and growth.

3. Ease of Transfer of Ownership: Shareholders can easily buy or sell their shares in the stock market, allowing for smooth transfer of ownership without disrupting business operations.

4. Perpetual Existence: The company's existence is separate from its shareholders. Even if shareholders change, the company continues to exist and operate.

5. Professional Management: Companies often hire professional managers to run the business, ensuring expertise in various areas and freeing shareholders from day-to-day operations.

6. Diversification: Investors can diversify their portfolios by investing in shares of different companies, reducing risk compared to investing in a single business.

7. Enhanced Credibility: Joint stock companies often have a higher level of credibility and reputation compared to other business forms, making it easier to attract customers and investors.

8. Access to Resources: The ability to issue shares and raise capital from the public gives joint stock companies access to a wide range of resources for expansion and development.

Limitations of Joint Stock Company:

1. Complex Formation: Establishing a joint stock company involves legal formalities, documentation, and regulatory compliance that can be more complex than other business structures.

2. Loss of Control: As ownership is divided into shares, individual shareholders might have limited control over company decisions, especially in larger corporations.

3. Shareholder Conflicts: Disagreements among shareholders can arise over management, policies, and objectives, potentially leading to conflicts and affecting business operations.

4. Market Fluctuations: The value of shares in the stock market can be volatile, leading to uncertainty in terms of the company's valuation and shareholders' investments.

5. Dividend Pressure: Shareholders often expect dividends, which can put pressure on the company to distribute profits even if it would be wiser to reinvest them.

6. Disclosure Requirements: Joint stock companies are required to disclose financial and operational information, which might limit privacy and potentially expose sensitive data.

7. Regulatory Oversight: Companies are subject to various regulations and reporting requirements imposed by regulatory bodies, increasing administrative burdens.

8. Risk of Hostile Takeovers: When a substantial number of shares are owned by the public, the company is vulnerable to takeovers by external parties, impacting its direction.