Joint Stock Companies

A company is defined as a voluntary association of persons having separate legal existence, perpetual succession and a common seal. A company is an artificial person (an association of minimum 7 natural persons) created by incorporation under law, having common seal and perpetual succession. Once it is created by law, a company gets separate identity and it can enter into legal contracts under its common seal. An incorporated company enjoys perpetual (continuous) life until the law itself winds up the company in accordance with law. The capital of a company consists of transferable shares, and members have limited liability.

The capital is raised in the form of shares and called share capital. Share means a portion of capital raised by issue of shares. The liability is limited to the amount invested in shares. The shares are generally transferable except under certain circumstances when the transfer may be restricted. In view of limited liability and transferability of shares, large number of persons may come forward to invest, enabling rising of enormous capital. Since a company is an artificial person, operating powers get vested with the elected board of directors and gets delegated mainly to the managing director and the company secretary. In this way most of the shareholders are kept away from the day-to-day operations of the organization. Ultimately, functional experts are employed to manage and carry out the activities. This results in experts doing the respective job and performance gets enhanced.

Advantages

• Huge capital mobilization
• Facility of Transfer of ownership through transfer of shares
• Wide distribution of risk of loss with large membership and limited liability
• Comparatively lower tax liability

Disadvantages

• Excessive legal requirements at all stages from the time of formation.
• In practice fraudulent management and concentration of economic power & wealth are found
• Slow Decision making
• Double Taxation – once on the profit of the company and another in the hands of the share holder

Features of a Company

The following are the chief characteristics of the company form of organisation

• Registered body: A company comes into existence only after its registration. For that purpose, necessary legal formalities have to be completed as prescribed under the Companies Act.
• Distinct legal entity: A company is regarded as a legal entity separate from its members. Thus a company can carry on business in its own name, enter into contracts, sue, and be sued.
• Artificial person: A company is the creation of law and has a distinct entity. It is therefore, regarded as an artificial person. The business is run in the name of the company. But because it is an artificial person, its functions are performed by the elected representatives of members, known as directors.
• Perpetual succession: A company has continuous existence independent of its members. Death, insolvency, or change of members has no effect on the life of a company. The common saying in this regard is that members may come, members may go, but the company goes on forever. The life of the company can come to an end only through the prescribed legal procedure.
• Common seal: Since a company is an artificial person, it has no physical existence. The activities of the company are carried through a group of natural persons elected by its members (called directors). Every company must therefore, have a common seal with its name engraved on it. Anyone acting on behalf of the company must use the common seal to bind the company.
• Limited liability: The liability of the members of a company is limited. It is limited to the extent of capital agreed to be contributed. Beyond that amount, the members cannot be personally held liable for payment of the company’s debts.
• Transferability of shares: The capital of a company is divided into parts called shares. Normally the shares of a company are freely transferable by its members. However, transferability is restricted in the case of private company.

Private Limited Companies

A private limited company like partnership should have minimum of 2 members and ceiling of 50 members is there unlike no ceiling in public limited company. In case of private limited companies, there is no public issue of shares and the transfer of shares is restricted. The name of the company will include the words ‘private limited’.

This form of business organization enjoys the benefits of lower corporate tax, limited liability and continuity.