Joint Stock Company

A joint stock company is an association of persons formed to carry on business, having a legal status independent of its members.

Meaning: A company can be described as an artificial person with a separate legal entity, perpetual succession and a common seal. It is governed by The Companies Act, 2013 — under Section 2(20), a company means one incorporated under this Act or an earlier company law. The shareholders are the owners, while the Board of Directors — elected by the shareholders — is the chief managing body; owners thus exercise only indirect control. The company's capital is divided into small units called shares, which can be freely transferred from one shareholder to another (except in a private company).

Features

• Artificial person: A company is a creation of law. Like a natural person it can own property, incur debts, borrow, contract, sue and be sued — but it cannot breathe, eat or talk, so it is called an artificial person.
• Separate legal entity: From incorporation, the company has an identity distinct from its members; its assets and liabilities are separate from those of its owners.
• Formation: Forming a company is time-consuming, expensive and complicated, requiring many documents and legal compliances. Incorporation is compulsory under the Companies Act, 2013 (or an earlier company law).
• Perpetual succession: As a creation of law, a company can be ended only by law, through the process of winding up. "Members may come and members may go, but the company continues to exist."
• Control: The company's affairs are managed by the Board of Directors, which appoints the top management. Directors are accountable to shareholders, but shareholders have no right to run the day-to-day business.
• Liability: Members' liability is limited to the capital they have agreed to contribute. Creditors can claim only against the company's assets, and members can be asked to pay only the unpaid amount on their shares. Example: if Akshay holds 2,000 shares of Rs. 10 each and has paid Rs. 7 per share, his liability is limited to Rs. 6,000 — the unpaid Rs. 3 per share; beyond this he owes nothing.
• Risk bearing: Losses are borne by all the shareholders — unlike a sole proprietorship or partnership where one or a few bear them — so the risk is spread over a large number of shareholders.

Merits

• Limited liability: Shareholders are liable only for the unpaid amount on their shares; personal property stays free from the company's debts, reducing the investor's risk.
• Transfer of interest: Shares of a public company can be freely sold in the market and easily converted into cash, so investment is not blocked — making the company an attractive avenue for investment.
• Perpetual existence: The company's existence is unaffected by the death, retirement, insolvency or insanity of members; it continues even if all members die and can be ended only under the Companies Act, 2013.
• Scope for expansion: A company has large financial resources and can raise capital from the public and through bank/institutional loans, giving greater scope for expansion. Limited liability, transferable ownership and the chance of high returns attract investors.
• Professional management: A company can pay higher salaries to specialists and experts; its scale allows division of work with each department headed by an expert, leading to balanced decisions and greater efficiency.

Limitations

• Complexity in formation: Forming a company needs more time, effort and legal knowledge and is far more complex than a sole proprietorship or partnership.
• Lack of secrecy: A public company must file a great deal of information with the Registrar, which is available to the public, so complete secrecy is hard to maintain.
• Impersonal work environment: The separation of ownership and management and the large size of a company reduce personal involvement and make it hard to maintain personal contact with employees, customers and creditors.
• Numerous regulations: A company faces many legal provisions on audit, voting, filing of reports and documents, and must obtain various certificates (from the Registrar, SEBI, etc.), which reduces its freedom and consumes time, effort and money. …