Joint Stock Company-BBA Easy Notes-22

MDU BBA NOTES

SEMESTER-1

Business Organisation

Joint Stock Company

Joint Stock Company-BBA Easy Notes-22


Joint Stock Company

  • A Joint Stock Company is a voluntary association of persons to carry on the business. It is an association of persons who contribute money which is called capital for some common purpose.
  • These persons are members of the company. The proportion of capital to which each member is entitled is his share and every member holding such share is called a shareholder and the capital of the company is known as share capital.
  • The Companies Act of 1956 defines a joint stock company as an artificial person created by law, having a separate legal entity from its owner with perpetual succession and a common seal.
  • Shareholders of a Joint Stock Company have limited liability i.e liability limited by guarantee or shares. Shares of such a company are easily transferable.

Joint Stock Company

From the above definition, the following characteristics of a Joint Stock Company can be easily identified:-

1. Artificial Person

A Joint Stock Company is an artificial person as it does not possess any physical attributes of a natural person and it is created by law. Thus it has a legal entity separate from its members.

2. Separate Legal Entity

Being an artificial person a company has its own legal entity separate from its members. It can own assets or property, enter into contracts, sue, or can be sued by anyone in a court of law. Its shareholders can not be held liable for any conduct of the company.

3. Perpetual Existence

A company once formed continues to exist as long as it is fulfilling all the conditions prescribed by the law. Its existence is not affected by the death, insolvency, or retirement of its members.

4. Limited liability of shareholders

Shareholders of a joint stock company are only liable to the extent of shares they hold in a company not more than that. Their liability is limited by guarantees or shares held by them.

5. Common Seal

Being an artificial person a joint stock company cannot sign any documents thus this common seal is the company’s representative while dealing with outsiders. Any document having a common seal and the signature of the officer is binding on the company.

6. Transferability of Shares

Members of a joint stock company are free to transfer their shares to anyone.

7. Capital

A joint stock company can raise a large amount of capital by issuing its shares.

8. Management

A joint stock company has democratic management which is managed by the elected representatives of shareholders, known as directors of the company.

9. Membership

To form a private limited company minimum number of members prescribed in the Companies Act is 2 and the maximum number is 50. But in the case of a public limited company the minimum limit is 7 and no limit on the maximum number of members.

10. Formation

Generally, a company is formed with the initiative of a group of members who are also known as promoters but it comes into existence after completing all the formalities prescribed in the Companies Act 1956.

Advantages of Joint Stock Company

  1. The ability to mobilize through the issue of securities (both equity – shares and debt with different characteristics) significant investment resources in the amounts necessary for the functioning of a joint-stock
    company (corporation), providing its great financial power.
  2. Limited risk and possible financial losses of shareholders in the event of a corporation’s bankruptcy (shareholders are not liable for the corporation’s debts, risking only the amount of their investments in the corporation’s shares), the possibility of obtaining liquidation value.
  3. Continuity of existence (corporations are created for an indefinite period), which can be limited by the process of liquidation of the corporation (voluntary or compulsory in the event of bankruptcy).
  4. The versatility of a joint stock company as an organizational and legal form: it can be successfully applied in various sectors of the economy, both in large and medium and small enterprises.
  5. The possibility of alienating shares in favor of third parties, which serves as the basis for liquidity, without affecting the current functioning of the corporation (shares are transferred from one owner to another, but the corporation’s assets remain its property as a separate legal entity).
  6. A unified set of shareholders’ rights rigidly enshrined in legislation and the charter, clear regulation of individual procedures, and mechanism for the functioning of a joint-stock company (corporation).
  7. The need to disclose information by corporations in the securities market helps to fill the “information gap” about real and/or potential partners and counterparties, to form public opinion, and image, contributing to the practical implementation of other advantages.

Disadvantages Joint Stock Company

  1. Attracting investments by issuing securities requires labor and material costs, although the success of the placement of securities is not guaranteed and depends not only on the nature of the investment projects (programs) carried out at the expense of mobilized funds, but also on the conjuncture of financial markets.
  2. In the event of liquidation of a joint-stock company (in case of bankruptcy), there is a very high probability those shareholders may not receive anything after settlements with the corporation’s creditors; there is a risk of complete loss of capital (within the value of the stake).
  3. A corporation as a type of business organization presupposes a special procedure for paying income to investors – in the form of dividends, which often creates the problem of double taxation (corporate profits and shareholders’ income).
  4. Along with the costs of creating a corporation, there are significant costs for its further maintenance (including the preparation of reports, audit reports, and holding meetings of shareholders).
  5. If it is necessary to extract the money spent on the acquisition of shares, the shareholder has no right to demand from the corporation their return or redemption of the shares from him (except in certain cases). however, the sale of shares to third parties does not guarantee full reimbursement of funds contributed when purchasing them.
  6. Corporations are subject to numerous special rules governing various aspects of their activities, established by various authorities and enshrined in their bylaws.
  7. The need for wide disclosure of information on the securities market, as a rule, is not always desirable, since it requires not only certain financial costs but also there is a possibility of its use for their own purposes by competing structures. In the economic literature, the following main goals associated with the issue of shares are usually identified.

 

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