COMMERCIAL STUDIES

CHAPTER 7: JOINT STOCK COMPANY Class: IX

2017-2018
MEANING
A company is an artificial person created by the law, having a separate legal entity, with a perpetual
succession and a common seal.
DEFINITION
According to Prof. Haney, “Joint stock Company is a voluntary association of individuals for profit,
having a capital divided into transferable shares, the ownership of which is the condition of
membership.”
FEATURES OF A JOINT STOCK COMPANY
The features of a company organization is as follows
1.Separate Legal Existence: A company has a distinct legal entity independent of its members. It
can own property, make contracts and file suits in its own name. There can be contracts between the
Shareholders are not the joint owners of the company’s property.
2. Perpetual succession: A company is a creation of law and only law can bring an end to its
existence. Its life does not on the life of its members. The death, insolvency or lunacy of members
does not affect the life of the company. It exists even if all its members die.
3. Limited Liability: As a company has a separate legal entity, its members cannot be held liable
for debts of the company. The liability of every member is limited to the nominal value of the
shares bought by him or to the amount of guarantee given by him. For e.g. if a member has 50
shares of Rs.10 each, his liability is limited to Rs.500. Even if the assets of the company are
insufficient to satisfy fully the claims of the creditors, no member can be called to pay anything
more than what is due from him.
4. Transferability of shares: The capital of company is divided into parts. Each part is called a
share. These shares are generally transferable. A shareholder is fee to withdraw his membership
from the company by transferring his shares. However, in actual practice some restrictions are
placed on the transfer of shares.
5. Common Seal: As a company is an artificial entity it cannot act and sign itself. Therefore it acts
through human beings. All the acts of the company are authorized by its common seal. The
company seal is affixed on all important documents as a token of the company’s approval. The
common seal is the official signature of the company.
6. Separation of Ownership and Control: Members have no right to participate directly in the
day-to-day management of the company. They elect their representatives, called directors, who
manage the company’s affairs on behalf of the members. Thus, the ownership of a company is
distributed among the shareholders while management is vested in the board of directors.

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7. Voluntary Association: A joint stock company is a voluntary association (free will) of certain
persons formed to carry out a particular purpose in common. Members of a company can join it and
leave it at their own free will.
8. Artificial Legal Person: A company is an artificial person created by law. It exists only in
contemplation of law. It is competent to enter into contracts and to own property in its own name.
But it has no physical body of a natural human being.
9. Corporate Finance: The share capital of a company is generally divided into a large number of
shares of small value. These shares are purchased by a large number of people from different walks
of life.
10. Statutory Regulation and control: Government exercises control through company law over
the management of joint stock companies. A company is required to comply with several legal
formalities and to file several documents with the Registrar of Companies.

MERITS OF JOINT STOCK COMPANY

1. Legal Capital Resources – A company can accumulate huge amount of capital for large scale
enterprise. It has widespread appeal to investors of all types. Its capital is divided into shares of
small value so that people with limited means can also buy them.
2. Limited Liability- The liability of a member is limited to the face value of the shares held by
them. His personal property can be attached even if the company is unable to meets its creditors
claims.
3. Continuity of Existence – A joint stock company enjoys uninterrupted existence over a long
period of time. As company has separate legal, death or insolvency of its members does not affect
its existence.
4. Efficient Management – A company can employ highly qualified experts in the different areas
of business management. Employment of professional managers help in improving the of business
transactions.
5. Transferability of shares- The shares of a public company are listed on the stock exchange so
that a member can easily buy or sell his shares. He is not bound to keep the shares with him for life.
6. Economies of scale – The company form of business organization provides tremendous scope
for growth and expansion. Large capital and professional management facilities large- scale
operations.
7. Democratic Management –The membership of a public company is large and its ownership is
generally diffused. Management is vested in Boards of Directors elected by the members.
8. Goodwill - A company enjoys a good reputation and prestige in the business world. A
company’s activities are subject to scrutiny by auditors and the Government. Its account are
published and they are public documents.
9. Social Advantage – The company form of organization mobilizes scattered savings of the
community and channelizes them into productive uses. It thereby facilitates capital formation.

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DEMERITS OF JOINT STOCK COMPANY
1. Legal Formality – Formation of the company is time consuming and expensive process. Too
many legal formalities have to be observed and several legal documents have to be prepared and
filed. Delay in the formation may deprive the business the momentum of early start.
2. Lack of Motivation – The directors and other officers of a company have a little personal
involvements in the efficient management of a company. There is no direct link between effort and
reward. It is difficult to keep a personal touch with the customers and the employees. Hence the
efficiency of the business operations is low.
3. Delay in Decision – Red tape and bureaucracy do not permit quick decisions and prompt action.
There is little scope for personal initiative and sense of responsibility. Paid employees like to play
safe and tend to shift responsibility.
4. Economic Oligarchy – The management of company is supposed to be carried on according to
the collective of its members. But in practice, it is ruled by a few people (oligarchy). Often the
directors try to mislead members and manipulate the voting power to maintain their control.
5. Corrupt Management – There is often a danger of fraud and misuse of the property by
dishonest management. Bogus companies may be formed to deprive the investors of their hard
earned money.
6. Excessive Government control – At every stage in the management of a company, there are
rules and regulations. Several legal provisions have to be followed and reports have to be filed.
Such legal interference in day- to day operations results in lack of secrecy.
7. Unhealthy Speculation – The prices of the shares keep fluctuating depending upon the financial
health, dividends and future prospects and reputation of the company. Directors may manipulate
annual accounts to make illegal gains through speculation in the company’s shares. Violent
fluctuations in share prices caused by unhealthy speculation reduce the investor’s confidence and
lead to financial crisis.
8. Conflicts of Interests – There is a possibility of conflicts between various groups like
shareholders, debenture holders, directors etc. such conflicts reduces the employee morale and
efficiency of operations.
9. Social Evils –Company form of organization may give rise to the growth of private monopoly
and concentration of wealth in hands of few. Big companies may use their power to influence
politicians and government officials leading to corruption in public life.

Types of Joint Stock Company

On basis of membership:

Joint Stock
Company

Private Public Government

Company Company Company

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Q. What is a Private Company and state its essential features?
Ans: A Private Company means a company which has minimum paid up capital of one lakh rupees
or such higher capital as may be prescribed by its Article of Association.
The features are as follows
a) It restricts the right of its members to transfer its shares.
b) A private company can be registered with only two members.
c) The minimum number of members is two and maximum members cannot exceed more than
fifty.
d) It prohibits any invitation to the public to subscribe for any shares or debentures of the
company.
e) It prohibits any invitation or acceptance of deposits from persons other than its members,
directors and their relatives.
f) It must use the words ‘Private Limited’ after its name.
g) E.gs: Ravish Private Limited, Reliance Private Ltd. etc.

Q. What is a Public Company and state its essential features?

A public company is one which has a minimum paid up capital of five lakh rupees or such higher
paid up capital as may be prescribed.
a) It is not a private company.
b) A public company must have at least seven members and there is no maximum limit for the
members.
c) It is free to invite the public to buy its shares and debentures.
d) Tata Iron and Steel Co. (TISCO), Reliance Industries Limited, Larsen and Toubro (L&T) ltd.,
are some examples of public company in India.
Q. What is a government company?
Ans: A company of which not less than 51% of the paid up share capital is held by the central
government or any state government or governments, singly or jointly, is called a Government
company. It includes a company subsidiary to a Government company.
E.gs: Hindustan Machine Tools Ltd., Bharat Heavy Electrical Ltd., Mahanagar Telephone Nigam
Ltd., National Thermal Power Corporations Ltd., State Trading Corporation Ltd, are some of the
examples of government companies in India.

What are the Privileges of a Private Company?

A private company enjoys several exemptions and privileges under the Companies Act. Some of
these privileges are given below:
1. Members: A private company can be started by two persons only whereas seven persons are
required to start a public company.
2. Commencement of Business: A private company can commence business immediately after its
incorporation. It is not required to obtain the certificate of commencement of business
3. Prospectus: A private company is not required to issue or file a prospectus or statement in lieu
of prospectus with the Registrar of companies.

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4. Statutory Meeting: A private company is not required to hold a statutory meeting or to file a
statutory report with the Registrar.
5. Directors: A Private company can have only two directors. It is exempted from restrictions
relating to the appointment, reappointment, retirement, remuneration, etc., of managerial
personnel.
6. Shares: A private company can issue deferred shares with disproportionate voting rights. It is not
required to observe restrictions concerning allotment of shares, minimum subscription, right
shares, investment of funds in the same group of companies, etc.
7. Transfer of Shares: A private company can refuse to register any transfer of shares without any
appeal.
8. Accounts: A private company is not required to keep its annual accounts open for inspection
for non-members.
9. Quorum: Two members personally present is sufficient quorum for the general meeting of a
private company.
10. Index of Members: A private company is not required to prepare and maintain any index to the
Register of Members
Advantages of a Private company
A private limited company enjoys the following advantages
1. Ease of Formation: A private company can be formed by two persons only. It can start its
business immediately after incorporation and is not required to wait for the certificate of
commencement of business.
2. Greater Flexibility: A private company is required to perform lesser legal formalities as
compared to a public company. It enjoys special exemptions and privileges under the company
law. Therefore, there is elasticity of operations in a private company.
3. Quick decisions: In a private company there is lesser number of people to be consulted. Family
members, relatives and close friend form the company. They can take prompt decisions.
4. Secrecy: A private company is not required to publish its accounts or file several documents.
Therefore, it is in a better position than a public company to maintain business secrets.
5. Continuity of Policy: The same persons continue to manage the affairs of a private company.
Relations between them are close and continuity of policy can be maintained.
6. Limited Liability: The Liability of members in a private company is limited.
7. Personal Touch: there is a greater personal touch with employees and customers in a private
company. There is also greater incentive to work hard and take initiative in the management of
business due to little separation between ownership and management.
Disadvantages of a Private company
A private company suffers from following limitations:
1. Smaller Resources: A private company cannot have more than fifty members. Its credit
standing is lower than that of a public company. Therefore, the financial and managerial
resources of a private company are comparatively limited.
2. Lack of Transferability of shares: There are restrictions on the transfer of shares in a private
company. As a result a shareholder cannot leave a private company easily and quickly.
3. Poor Protection of Shares: A private company enjoys several exemptions from various
provisions of the Companies Act. Minority members may suffer at the hands of the majority
members. Dissatisfied members cannot cut off their connection with the company except at a
loss.
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4. No Valuation of Investment: Shares of a private company are not listed on stock exchange.
There is no regular dealing in these shares. A shareholder cannot, therefore, know the real value
of his investment in a private company.
5. Lack of Public Confidence: Public has little confidence in a private company because its
affairs are unknown and it is not subject to strict control under the law.

Distinguish between Private Company and Public Company

Private Company Public Company

1. A Private company is a company which
has minimum paid- up capital of one lakh
rupees or more as prescribed by Articles of
Association.
2. The minimum number of members is
two and maximum number of members is
fifty.
3. The minimum numbers of directors are
two in a private company.
4. It cannot to invite the public to buy its
shares and debentures.
5. It need not hold a statutory meeting.
6. Its shares are not easily transferable.
7. It can commence business immediately
after its incorporation.
8. No government approval required
appointment, reappointment, etc. of
directors.
9. It must use ‘Private Limited’ after its
name. e.g: Flipkart online services Pvt.
Ltd.
1. A Public company is a company which
has minimum paid- up capital of five lakh
rupees or more as prescribed by Articles of
Association.
2. The minimum number of members is
seven and there is no limit to maximum
number of members.
3. The minimum numbers of directors are
three in a public company.
4. It is free to invite the public to buy its
shares and debentures.
5. It must hold a statutory meeting
6. Its shares are easily transferable.
7. It cannot commence its business after
incorporation unless certificate of
commencement of business is obtained.
8. Appointment, reappointment, etc. of
directors is subject to government
approval.
9. It uses ‘Public Limited’ after its name.
e.g: Reliance Industries Ltd. etc.

Distinguish between Joint Stock Company and Partnership.

Joint Stock Company Partnership

1. A company is an artificial person created 1. Partnership means when two or more

by the law, having a separate legal entity, person agree to do a lawful business and
with a perpetual succession and a common share its profits and losses.
seal.
2. Members in private company The minimum number of partners are 2 and
Minimum -2 maximum 10 in banking business and
Maximum -50 minimum 2 and maximum 20 in non-
Members in public company banking business.
Minimum -7
Maximum - unlimited
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 3. A Joint stock company is created by
incorporating it under the companies Act.
4. It has distinct legal entity separate from
members.
5.Laibility is limited upto the face value of
shares held by the members.
6.The shares are transferable in public
company without others permission.
7.Members elect directors who manage the
company.
8.The registration of firm is compulsory.
9.It is governed under Companies
Act,1956.
10.It does not dissolve by death,
insolvency, lunacy of any of its members.
3. A partnership is created by a written or
an oral agreement.
4. It does not have separate legal entity
from the partners.
5.The partners have unlimited liability.
6.Shares are not transferable without the
consent of other partners.
7.Every partner has right to take part in the
management of the firm.
The registration of firm is not compulsory
but desirable.
9.It is governed under Indian Partnership
Act,1932.
10.It is dissolved by death, insolvency or
lunacy of any of the partner.

Extra Questions:
1. Discuss types of joint stock companies on the basis of Mode of Incorporation.
2. Explain the types of joint stock companies on basis of liability.
3. How can joint stock companies be classified on the basis of nationality?
4. Describe One Person Company.
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