Joint Stock Company: Meaning, Features, Merits & Demerits, Types

What is Joint Stock Company?

An association of different individuals formed to carry out business activities is known as a joint stock company. This form of organization has an independent legal status from its members. Basically, a joint stock company is an artificial individual with a separate legal entity, common seal and perpetual succession. The Joint Stock Company form of organization is governed by the Companies Act, 2013. The shareholders of the company are its owners; however, the Board of Directors is elected by the shareholders and is the chief managing body of the company. Usually, the shareholders or the owners of the company have indirect control over its operations.

Joint Stock Company is meant as an association of many persons who contribute money or money’s worth to a common stock and employ it for some common purpose.          – Justice Lindley

A Joint Stock Company is an artificial person, invisible, intangible and existing only in the eyes of law.         – Chief Justice Marshall

Features of Joint Stock Company

The main characteristics of a joint stock company are as follows:

1. Separate Legal Existence: A company has a separate legal existence, which means that it can carry on the business activities in its own name, and can buy and sell goods, assets, etc., in its own name. A company can also enter into a contract with outsiders in its own name. Also, the company and its members are separate individuals. 

2. Artificial Person: Like a human being, a company does not have a physical body; instead by law, it is an artificial person. It means that the operations of a company are performed by the elected representatives of the members, also known as directors. However, the business is run in the name of the company. 

3. Registration: Getting registered under the Companies Act, 2013 is legally compulsory for a company. It means that a company cannot come into existence without registration. 

4. Perpetual Succession: A company’s existence is independent of its members. A company is formed by law and can only end by law, i.e., the death, incapacity or insolvency of any of the members of the company does not have any effect on its existence. In simple terms, members may come and go, but the company goes on forever, and the life of the company can come to an end only through the legal process of winding up. 

5. Common Seal: As a company is an artificial person, it cannot sign any contract, etc., therefore, every company needs a common seal with its name engraved on it. A group of members performs different activities of the company, and those people acting on behalf of the company can use the common seal as signature of the company. It means that any document that does not contain the common seal of the company is not binding on the company. 

6. Transferability: A company’s capital is divided into shares and the members of the company can freely transfer those shares. The shareholders can easily free themselves from their membership by selling their shares. However, the shares of a private limited company are not easily transferable. 

7. Separation of Ownership and Control: The owner of a company are its shareholders who elect their representatives, also known as directors of the company. The directors of the company are responsible for the management and control of business activities and they do so by appointing professional experts in different fields. 

8. Limited Liability: The liability of the members of a company is limited to the extent of the share contributed by them in the company. For instance, if a member has contributed ₹1,00,000 (1000 shares of ₹100 each), then the member will be liable up to ₹1,00,000 only in case of insolvency or winding up of the business, etc. 

Merits of Joint Stock Company

The important advantages of a joint stock company are as follows:

1. Limited Liability: The liability of the members of a company is limited to the extent of the share contributed by them in the company. If a company faces a loss, the shareholders of the company do not have to sell off their personal property for repayment. This advantage of a joint stock company attracts people to invest money in the Company Form of Business.

2. Transfer of Interest: As the shares of a company are transferrable and can be easily bought and sold in the market, it brings liquidity of investment in the company. The shareholders can anytime convert their share investment into cash and can use that amount to buy the shares of another company. 

3. Perpetual Existence: As the company form of business has a separate legal existence from its members, it enjoys perpetual succession. It means that a company can be formed by law and can end by law through the process of winding up only, i.e., the death, insolvency, and incapacity of the members do not have any effect on the company’s existence. 

4. Growth and Expansion: A company has more scope for expansion and growth because it has large financial resources and high profit rates. It means that if a company has retained profits, it can easily use that amount for its growth and expansion. 

5. Efficient Management: Every business requires specialised people and experts for better performance and results. As a company has huge funds at its disposal, it can easily hire experts to perform various business activities, and can efficiently improve its working and performance. 

6. Large Amount of Capital: As a company can issue shares to the general public, it grabs the biggest advantage of large capital. Besides, the value of a share is very low; therefore, people with less or small savings can also buy shares of a company. Also, a company can raise funds by issue of debentures, raising loans from financial institutions, and other securities. 

Demerits of Joint Stock Company

The major limitations of a joint stock company are as follows:

1. Complexity in Formation: The process of the formation of a company is quite complicated and lengthy. It requires the completion of various formalities, and various different documents have to be prepared and submitted. It also requires obtaining different kinds of permissions. For all these activities, a company has to hire experts who charge high fees for the same. Besides, registration fees have to be paid to the registrar of companies. 

2. Lack of Secrecy: According to the Companies Act, 1956 every company has to share various information about it with the registrar of companies, which is made available to the general public also. This compulsion of sharing information makes it difficult for the company to maintain secrecy about its operations. 

3. Impersonal Work Environment: As a company is managed by hired professionals and experts, instead of its owners, and the professionals get a salary in return, there is no direct relationship between the efforts and reward of the business activities. In other words, if there is an increase in the profits of a company, it will not increase the salary of the experts, which results in a lack of motivation and incentive for efficient performance. 

4. Numerous Regulations: A company has to fulfil a number of formalities at different stages of the business, and if it fails to meet any of these formalities, it has to bear the penalty. It also has to file annual reports and return every year with the registrar of the companies, which involves a huge amount of money and time of the company. Besides, it also hinders the secrecy of the company as there is regular interference in the operations of the business. 

5. Delay in Decisions: The important decisions in a company are taken after consulting with different people or discussing in the board meeting, which is a lengthy process. Also, once a decision is made, communicating the decision to every person at different levels of the company is also a lengthy process. Therefore, making decisions and implementing them can delay things in a company. 

6. Oligarchic Management: Although it is said that a democratic setup exists in a company, the truth is that it exists only on paper and not in real life. In reality, the control of a company is in the hands of a few people only, who are known as the directors of the company. The directors take every decision of the company and they do so by keeping their personal benefits and interests in their minds and do not think about the interest of the company and its shareholders. 

7. Conflicts in Interests: Various groups of people such as debenture holders, shareholders, directors, employees, managers, etc., are involved in the operations of a company, and every group has its own interest. It is not possible that every group’s interest aligns with a decision, which can result in conflicts in interests between different groups. 

After comparing the features, merits, and demerits of a company, it can be said that this form of business organisation is suitable for basic and heavy industries, businesses requiring a huge amount of funds with heavy risks, and businesses with large-scale operations. 

Types of Companies

Based on ownership, there are three categories of companies; viz., Private Ltd. Company, Public Ltd. Company, and One Person Company. 

1. Private Ltd. Company

According to Section 2(68) of the Indian Companies Act, 2013, a Private Company by its article is a company which:

1. Restricts the rights to transfer its shares.
2. Has a minimum 2 and a maximum of 200 members, excluding the present and past employees.
3. Prohibits any invitation to the public to subscribe for a company’s securities. 

2. Public Ltd. Company

A company which is not a private company is a Public Ltd. Company; however, a private company which is a subsidiary of a public company is treated as a public company. According to the Companies Act, a public company is a company which :

1. Has minimum 7 members and no limit on the maximum number of members.
2. Has no restriction on the transfer of securities.
3. Is not prohibited to invite the general public to subscribe to its securities. 

Company Limited by Guarantee

A company with no shareholders, which is owned by the members, also known as guarantors is known as a Company Limited by Guarantee or a Guarantee Company. The guarantors agree to pay a nominal amount to the company if it gets wound up. This form of business is usually used for non-profit organisations. 

Company Limited by Shares

A company with members whose liability is limited to the amount unpaid (if any) on the shares held by them is known as a Company Limited by Shares. 

3. One Person Company

According to the Companies Act, 2013, apart from a public or private limited company, one can also form a new type of entity, One Person Company (OPC). As per section 3(1) of the Companies Act 2013, a One Person Company is a company which has only one person as its member. Rule 3(1) states that only a natural person who is also an Indian citizen and resident is eligible to incorporate One Person Company. 

Besides, an individual cannot incorporate more than one OPC or become a nominee in more than one OPC. Also, if an OPC’s paid-up share capital exceeds fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees, it has to compulsorily convert itself into a public or private company.