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karnataka class 12 commerce Accountancy Meaning of Joint Stock Company

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karnataka class 12 commerce Accountancy Meaning of Joint Stock Company

karnataka class 12 commerce Accountancy Meaning of Joint Stock Company

Objectives

  • After studying this lesson, you will be able to:
  • define Joint Stock Company ;
  • state the characteristics of Joint Stock Company;
  • identify the different types of Joint Stock Company;
  • discuss the advantages and limitations of Joint Stock Company;
  • suggest the suitability of Joint Stock Company as a form of Business organisation;
  • explain the meaning and features of a Multinational Company; and
  • enumerate the advantages and limitations of Multinational Company

karnataka class 12 commerce Accountancy Meaning of Joint Stock Company

Meaning of Joint Stock Company

In a partnership firm we know that the number of partners cannot exceed 20. So there is a limit to the contribution of capital. Secondly, even if the partners could contribute a large amount of capital, they would hesitate to do so considering the risk involved in business and their unlimited liability. Mainly to take care of these two problems, a company form of business organisation came into existence.

A company form of business orgnisation is known as a Joint Stock Company. It is a voluntary association of persons who generally contribute capital to carry on a particular type of business, which is established by law and can be dissolved only by law. Persons who contribute capital become members of the company. This form of business has a legal existence separate from its members, which means even if its members die, the company remains in existence. This form of business organisations generally requires huge capital investment, which is contributed by its members. The total capital of a joint stock company is called share capital and it is divided into a number of units called shares. Thus, every member has some shares in the business depending upon the amount of capital contributed by him. Hence, members are also called shareholders.

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

karnataka class 12 commerce Accountancy Meaning of Joint Stock Company

Characteristics of Joint Stock Company

You are now familiar with the concept of company as a form of business organisation. Let us now study its characteristics.

i. Legal formation No single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company comes into existence only when it has been registered after completion of all formalities required by the Indian Companies Act, 1956.

ii. Artificial person Just like an individual, who takes birth, grows, enters into relationships and dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is

iii. Separate legal entity Being an artificial person, a joint stock company has its own separate existence independent of its members. It means that a joint stock company can own property, enter into contracts and conduct any lawful business in its own name. It can sue and can be sued by others in the court of law. The shareholders are not the owners of the property owned by the company. Also, the shareholders cannot be held responsible for the acts of the company

iv. Common seal A joint stock company has a seal, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organisation working on behalf of the company. Any document, on which the company’s seal is put and is duly signed by any official of the company, become binding on the company. For example, a purchase manager may enter into a contract for buying raw materials from a supplier. Once the contract paper is sealed and signed by the purchase manager, it becomes valid. The purchase manager may leave the company thereafter or may be removed from the job or may have taken a wrong decision, yet for all purposes the contract is valid till a new contract is made or the existing contract expires.

v. Perpetual existence A joint stock company continues to exist as long as it fulfils the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its members. For example, in case of a private limited company having four members, if all of them die in an accident the company will not be closed. It will continue to exist. The shares of the company will be transferred to the legal heirs of the deceased members.

vi. Limited liability In a joint stock company, the liability of a member is limited to the extent of the value of shares held by him. While repaying debts, for example, if a person owns 1000 shares of Rs. 10 each, then he is liable only upto Rs 10,000 towards payment of debts. That is, even if there is liquidation of the company, the personal property of the shareholder can not be attached and he will lose only his shares worth Rs. 10,000.

vii. Democratic management Joint stock companies have democratic management and control. That is, even though the shareholders are owners of the company, all of them cannot participate in the management of the company. Normally, the shareholders elect representatives from among themselves known as ‘Directors’ to manage the affairs of the company.

karnataka class 12 commerce Accountancy Meaning of Joint Stock Company

Advantages of Joint Stock Company

You must be keen to know why we should form a company for carrying out business? Obviously, this is because there are many advantages which the company form of business organisation enjoys over other forms of business organisation. Let us read about those advantages.

The main advantages of Joint Stock Company are –

(i) Large financial resources: A joint stock company is able to collect a large amount of capital through small contributions from a large number of people. In public limited company shares can be offered to the general public to raise capital. They can also accept deposits from the public and issue debentures to raise funds.

(ii) Limited Liability: In case of a company, the liability of its members is limited to the extent of the value of shares held by them. Private property of members cannot be attached for debts of the company. This advantage attracts many people to invest their savings in the company and it encourages the owners to take more risk.

(iii) Professional management: Management of a company is vested in the hands of directors, who are elected democratically by the members or shareholders. These directors as a group known as Board of Directors ( or simply Board) manage the affairs of the company and are accountable to all the members. So members elect capable persons having sound financial, legal and business knowledge to the board so that they can manage the company efficiently.

(iv) Large-scale production: Due to the availability of large financial resources and technical expertise it is possible for the companies to have large-scale production. It enables the company to produce more efficiently and at lower cost.

(v) Contribution to society: A joint stock company offers employment to a large number of people. It facilitates promotion of various ancillary industries, trade and auxiliaries to trade. Sometimes it also donates money towards education, health and community services.

(vi) Research and Development: Only in company form of business it is possible to invest a lot of money on research and development for improved processes of production, new design, better quality products, etc. It also takes care of training and development of its employees.

karnataka class 12 commerce Accountancy Meaning of Joint Stock Company

Limitations of Joint Stock Company

In spite of many advantages of the company form of business organisation, it also suffers from some limitations. Let us note the limitations of Joint Stock Companies.

(i) Difficult to form: The formation or registration of joint stock company involves a complicated procedure. A number of legal documents and formalities have to be completed before a company can start its business. It requires the services of specialists such as Chartered Accountants, Company Secretaries, etc. Therefore, cost of formation of a company is very high.

(ii) Excessive government control: Joint stock companies are regulated by government through Companies Act and other economic legislations. Particularly, public limited companies are required to adhere to various legal formalities as provided in the Companies Act and other legislations. Non-compliance with these invites heavy penalty. This affects the smooth functioning of the companies.

(iii) Delay in policy decisions: Generally policy decisions are taken at the Board meetings of the company. Further the company has to fulfill certain procedural formalities. These procedures are time consuming and therefore, may delay action on the decisions.

(iv) Concentration of economic power and wealth in few hands: A joint stock company is a large-scale business organisation having huge resources. This gives a lot of economic and other power to the persons who manage the company. Any misuse of such power creates unhealthy conditions in the society, e.g., having monopoly over a particular business or industry or product; exploitation of workers, consumers and investors.

karnataka class 12 commerce Accountancy Meaning of Joint Stock Company

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