Question

Explain meaning, features, merits and demerits of joint stock company.

Answer 1

Joint stock company is a voluntary association of persons having a separate legal existence, perpetual succession and common seal. Its capital is divided into transferable shares. 

Features: 

• Separate legal existence: It is created by law and it is a distinct legal entity independent of its members. It can own property, enter into contracts, can file suits in its own name. 
• Perpetual existence: Death, insolvency and insanity or change of members has no effect on the life of a company. It can come to an end only through the prescribed legal procedure. 
• Limited Liability: The liability of every member is limited to the nominal value of the shares bought by him or to the amount, guaranteed by him. 
• Transferability of shares: Shares of public company are easily transferable. But there are certain restrictions on transfer of share of private company. 
• Common seal: It is the official signature of the company and it is affixed on all important documents of company. 
• Separation of ownership and control: Management of company is in the hands of elected representatives of shareholders known individually as director and collectively as board of directors.

Merits: 

• Limited liability: Limited liability of shareholders reduces the degree of risk borne by him. 
• Transfer of Interest: Easy transferability of shares increases the attractiveness of shares for investment. 
• Perpetual existence: Existence of a company is not affected by the death, insanity, insolvency of member or change of membership. Company can be liquidated only as per the provisions of companies Act. 
• Scope for expansion: A company can collect huge amount of capital from unlimited number of members who are ready to invest because of limited liability, easy transferability and chances of high return.
• Professional management: A company can afford to employ highly qualified experts in different areas of business management. 

Limitations: 

• Legal formalities: The procedure of formation of company is very long, time consuming, expensive and requires lot of legal formalities to be fulfilled. 
• Lack of secrecy: It is very difficult to maintain secrecy in case of public company, as company is required to publish and file its annual accounts and reports.
•  Lack of motivation: Divorce between ownership and control and absence of a direct link between efforts and reward lead to lack of personal interest and incentive. 
• Delay in decision making: Red tapism and bureaucracy do not permit quick decisions and prompt actions. There is little scope for personal initiative. 
• Oligarchic management: Company is said to be democratically managed but actually managed by a few people i.e., Board of Directors. Sometimes they take decisions keeping in mind their personal interests and benefit, ignoring the interests of Shareholders and company.