Joint Stock Company: Characteristics, Advantages and Disadvantages

What is a Joint Stock Company?

A Joint Stock Company form of business organization is given a legal status; is subject to certain legal regulations; is a voluntary association of persons to carry on business. A Joint Stock Company is an association of persons who generally contribute money for some common purpose and such contribution is called the capital of the company.

The persons who contribute capital are members of a Joint Stock Company. Every member contributes money as per their own ability and desire and the proportion of capital to which each member is entitled is called his share, therefore members of a joint stock company are known as shareholders, and the capital of the company is known as share capital.

The total share capital is divided into a number of units known as ‘shares’. One may have heard of the names of joint stock companies like Birla Group of Companies, Reliance Industries Limited, Tata Iron & Steel Co. Limited, Hindustan Lever Limited, Larson & Tubro Steel Authority of India Limited, Balsara, Ponds India Limited etc.

The companies are governed by the Indian Companies Act, of 1956. The Act defines a company as an artificial person created by law, having a separate entity, with perpetual succession and a common seal.


Characteristics of Joint Stock Company

These are the characteristics of joint stock company explained below:

  1. Artificial Person
  2. Separate Legal Entity
  3. Common Seal
  4. Perpetual Existence
  5. Limited Liability
  6. Transferability of Shares
  7. Formation
  8. Membership
  9. Number of Directors
  10. Management
  11. Raising of Capital

Artificial Person

A Joint Stock Company is created by law and does not possess the physical attributes of a natural person and is therefore called an artificial person. However, it has a separate legal status and it can sue or can be sued by any person.

Separate Legal Entity

The major advantage is that being an artificial person, a company has an existence independent of its members. A Joint Stock Company can own property, enter into contracts, and conduct any lawful business in its own name and can sue and can be sued in a court of law. A shareholder cannot be held responsible for the acts of the company like sole proprietorship or partnership firms.

Common Seal

As a Joint Stock Company is created by law and does not possess the physical attributes of a natural person every company has a common seal by which it is represented while dealing with outsiders and all its stakeholders. The company is responsible for using the company seal. Any document with the common seal and duly signed by an officer of the company is binding on the company.

Perpetual Existence

A Joint Stock Company is created by law and its survival is not affected by the death, lunacy, insolvency, or retirement of any of its members. A company once formed continues to exist as long as it fulfills the requirements of law.

The owner of the firm may change due to the transfer of ownership of shares to others but it does not affect the existence of the company.

Limited Liability

In the case of payment of debts by the company, a shareholder is held liable only to the extent of the face value of a share. The liability of a member of a Joint Stock Company is limited by guarantee or the shares he owns and his personal property are not at stake for payment of the company’s liability.

Transferability of Shares

The members/shareholders of a company are free to transfer the shares held by them to anyone else and there is no restriction to own shares.

Formation

When a company has been registered by completing the formalities prescribed under the Indian Companies Act 1956 it comes into existence. A company is formed by the initiative of a group of persons known as promoters who complete all the legal formalities and submit required documents to the Registrar of the Companies in their respective territories.

Membership

There is a difference between the number of members for Private Limited Companies and Public Limited Companies.

For a Private Limited Company, there should be a minimum of two persons as a member and the maximum limit is fifty members excluding present employees as members and ex-employees as members. But in the case of a Public Limited Company, the minimum is seven and the maximum membership is unlimited.

Number of Directors

In the case of a Public Limited Company, there should be a minimum of 03 boards of directors & maximum of 12, and there is a provision for appointing more directors provided permission is taken from the central Government for the same. In the case of a Private Limited Company minimum of 02 directors and a maximum number of directors, there is no limit.

Management

Joint Stock Companies follow democratic management and control where only elected directors manage the business.

In other words, the company is managed by the elected representatives of shareholders known as Directors. Even though the shareholders are the owners of the company, all of them cannot participate in the management process.

Raising of Capital

A Joint Stock Company generally raises a large amount of capital through the issue of shares to the public at large. Companies can collect required finance through the issue of different types of shares such as Equity Shares, Preference Shares, and Debentures. The company can also collect deposits from the public to meet financial requirements.


Advantages of Joint Stock Company

The following are the advantages of joint stock company:

  1. Limited Liability
  2. Continuity of Existence
  3. Benefits of Large-Scale Operation
  4. Professional/Efficient Management
  5. Social Benefit
  6. Research and Development
  7. Public Confidence

Limited Liability

The liability of members in a Joint Stock Company is limited to the extent of the face value of shares held by them. Such a limited liability concept helps the company to raise huge capital by attracting a large number of small investors to invest in the company.

The risk-talking ability of the company is more due to the limited liability of its members and their personal properties are not at stake in case of inability of the company to meet its debt repayment.

Continuity of Existence

A company has a perpetual existence as a company is an artificial person; created by law and possesses independent legal status; and its survival is not affected by the death, insolvency, etc. of its members.

The stability of the company organization permits it to undertake projects of long duration and also offers a great attraction to the creditors and investors to put their resources into the business.

Benefits of Large-Scale Operation

It is only the company form of organization that can provide huge capital for large-scale operations and it further leads to an increase in efficiency and reduction in the cost of operation through large-scale production. It further opens the scope for the expansion of business.

Professional/Efficient Management

Due to the complex nature of activities and operations and a large volume of business, the Company’s form of business requires professional managers at every level of the organization to handle such complexities. The company’s financial strength permits them or can afford to appoint such professional managers.

Professional managers are able to show better business results by adapting themselves to newer, better, unconventional, and even more risky methods of organization and management. The dynamism and adventurism on the part of professional managers is possible because they are trained that way and also because they do not have much financial stake in the company.

Social Benefit

A joint stock company provides many benefits to society such as it offers employment to a large number of people; it facilitates the promotion of various ancillary industries, trade, and auxiliaries to trade.

Sometimes donation comes in the form of money and various facilities from various industries for education, health, and community service and also renders help to charitable and social institutions.

Research and Development

Considering their specialization different companies company generally invest a lot of money in research and development for designing and innovating new products to satisfy the needs of people in a better way; for improving processes of production, improving quality of product, and identifying new ways of training its staff, etc.

Public Confidence

A company organization greatly enjoys the confidence and trust of the public as the affairs of the company are open to the public and not secret. A company is under a statutory obligation to make its activities open to the public through accounts and annual reports.

Progressive and enlightened management even voluntarily disclose to the public its activities in wider dimensions than what is required under the law. Such confidence of the public helps in raising additional capital, selling its products, and undertaking growth and expansion programs.


Disadvantages of Joint Stock Company

The disadvantages of joint stock company are:

  1. Formation is Complex
  2. Control by a Group
  3. Speculation on Company’s Shares
  4. Excessive Government Control
  5. Delay in Policy Decision-making and Implementing
  6. Social Abuses
  7. Conflict of Interest
  8. Corruption of Political System

Formation is Complex

The formation of a company involves the preparation of many documents (like a Memorandum of Association, Articles of Association, and Prospectus) in order to ensure compliance with a number of legal formalities under the Companies Act of 1956 and compliance with several other Laws.

Such compliance with many legal formalities makes the task of starting a company more complex compared to a sole proprietorship or partnership business. These legal formalities are not only time-consuming but also costly and it does not end with the formation of a company but extend to the operation stage of business.

Control by a Group

Companies are controlled by a group of elected persons known as the Board of Directors. Directors and paid officials are not as sincere and honest in managing company affairs as owners would be.

In practice it has been observed that the company’s directors are not in a position to control the organizational activities properly, which may be due to a lack of interest on the part of the shareholders who are widely dispersed; ignorance, indifference, and lack of proper and timely information about the operation of the company. Thus, the democratic virtues of a company do not really exist in practice.

Speculation on Company’s Shares

The value or price of a share is determined in terms of the dividend expected and the reputation of the company and the shares of a company are bought and sold in the stock exchanges. These values of the shares can be manipulated and there exists excessive speculation in the stock market about shares of the companies which is regarded as a social evil.

Excessive Government Control

The smooth functioning of the companies is affected by the heavy penalties imposed by the Government for Non-compliance with the provisions of several Acts enacted by the Government from time to time.

A company has to file regular returns and periodical statements of income as each and every activity of the company is regulated by annoying legal provisions.

The result of all these is that either competent and dynamic entrepreneurs have to spend a lot of their precious time complying with these legal formalities or they have to spend a lot of money in creating a separate position or department for this purpose.

Delay in Policy Decision-making and Implementing

As per the Companies Act of 1956 and many other Laws, a company has to fulfill certain procedural formalities before making any policy decision. These formalities consume more time and, therefore, policy decisions may be delayed which may affect the performance of business.

Decisions are not taken by one person alone but through the committee of directors and it causes delays because of the time interval between meetings and the difficulty of getting the requisite quorum. Implementation is also delayed because instructions are to pass through several levels in the line of command from top to middle to operating management.

Social Abuses

A company operating as a large-scale business organization possesses huge resources, which in turn provides a lot of power to them. The company holds power over certain communities in terms of the supply of required products and services, providing employment to various sections of society, etc.

Any misuse of such power creates unhealthy conditions in society e.g. having a monopoly of a particular business, industry, or product; exploiting workers, consumers, and investors; influencing politicians and the Government in getting their work done, etc.

Conflict of Interest

Unlike the sole proprietorship or partnership where the interest of the proprietor or partners is dominant, a company organization displays a sense of conflicting interests among those who deal with it.

The interests of preference shareholders for more reserves come in conflict with equity shareholders who are interested in more dividends and the interest of directors and managers in more remuneration and full control over company affairs. The continuous warfare between different groups of people destroys the unity of purpose and makes it difficult to realize organizational objectives.

Corruption of Political System

In many democratic countries of the world, it is found that a big company tries to corrupt or destabilize the political system to harvest short-term personal gains. This is done by making unofficial, illegal financial contributions to political parties, supporting political candidates in elections, and other similar practices.


FAQs Section

What are the characteristics of joint stock company?

The characteristics of joint stock company are: 1. Artificial Person 2. Separate Legal Entity 3. Common Seal 4. Perpetual Existence 5. Limited Liability 6. Transferability of Shares 7. Formation 8. Membership 9. Number of Directors 10. Management.

What are the advantages of joint stock company?

Limited Liability, Continuity of Existence, Benefits of Large-Scale Operation, Professional/Efficient Management, Social Benefit, Research and Development, and Public Confidence are the advantages of joint stock company.

What are the disadvantages of joint stock company?

The following are the disadvantages of joint stock company:
1. Formation is Complex
2. Control by a Group
3. Speculation on Company’s Shares
4. Excessive Government Control
5. Delay in Policy Decision-making and Implementing
6. Social Abuses
7. Conflict of Interest
8. Corruption of the Political System.