Joint stock company

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Joint stock company

  1. 1. JOINT STOCK COMPANYMeaning of a Company: - Accounting to JamesStephenson, “a company is an association of manypersons who contribute money or money’s worth to acommon stock and employs it in some trade or business,and who share the profit and loss arising there from”.Under the Companies Act 1956, a Company is defined asa company limited by shares having a permanents paidup or nominal capital of fixed amount divided into sharesinto shares, also of fixed amount held and transferrableas stock and formed on the principles of having itsmembers of those shares or stock and no other persons”.
  2. 2. Definitions of a Company:- Accounting to Prof, “Joint stockcompany is a voluntary association of individuals for profit,having a capital divided into transferable share, theownership to which is the condition of membership”. In thewords of Justice Lindley, “By a company is meant anassociation of many persons and employ it for a commonpurpose. The common who contribute it or to whom itbelongs are members. The proportion of capital to whicheach member is entitled is his share. Shares are alwaystransferable, although the right to transfer them is oftenmore or les restricted”.Thus, a joint stock company is an incorporated association ofpersons having a separate legal existence, with a perpetualsuccession and common seal. Its capital is divided into shareswhich are freely transferable and the owners of these shareshave limited liability. It is an artificial person created by law.
  3. 3. Characteristics of a Company:- The distinctive features ofthe company form of organization are as follows:-1- Separate legal existence: - A company has a distinct legalentity independent of its members. It can own property,make contracts and file suits in its own name. Shareholdersare not the joint owners of the company’s property. Ashareholder cannot be held liable for the acts of thecompany. Similarly, members of the company are not itsagents. There can be contracts between a company and itsmembers. A creditor of the company is not a creditor of itsmembers.
  4. 4. The separate legal entity of a company was recognized in thefamous case of Salomon, v. Salomon and Co. Ltd. the facts of thecase were as follows:Salomon farmed a company which acquired his own shoebusiness. He took all the shares except six shares which hedistributed among his wife, daughter and four sons. Salomonalso purchased some debentures of the company which gave hima charge over its assets. At the time of winding up, thecompany’s assets were not sufficient enough to pay its debts.The creditors of the company (other than Salomon) argued thattheir debts should be cleared before paying Salomon for hisdebentures because Salomon and the company were one andthe same person. The Court decided that after incorporation,Solomon and Co. had an identity separate from Salomon eventhough he owned virtually all the shares in the company.
  5. 5. 2- Perpetual succession:- Perpetual succession means continuedexistence. A company is a creation of the law and only the lawcan bring an end to its existence. Its life does not depend on thelife of its members. The death, insolvency or lunacy of membersdoes not affect the life of a company. It continues to exits even ifall its members die. Members may come and go but the companygoes on until it is wound up.3- Limited liability:- As a company has a separate legal entity, itsmembers cannot be held liable for the debts of the company. Theliability of every member is limited to the nominal value of theshares bought by him or to the amount of guarantee given byhim. For instance, if a member has 50 shares of Rs. 10 each, hisliability is limited to Rs. 500. Even if the assets of the company areinsufficient to satisfy fully the claims of the creditors, no membercan be called to pay anything more than what is due from him.However, if the members of the company so desire they mayform a company with unlimited liability.
  6. 6. 4- Transferability of shares: - The capital of a company isdivided into parts. Each part is called a share. These sharesare generally transferable. A shareholder is free to withdrawhim membership form the company b y transferring hisshares. However, in actual practice some restrictions areplaced on the transfer of shares.5- Common seal: - Being an artificial entity, a companycannot act and sign itself. Therefore, it acts through humanbeings. All the acts of the company are authorized by itscommon seal. The name of the company is engraved on itscommon seal. The Common seal is affixed on all importantdocuments as a token of the company’s approval. Thecommon is the official signature of the company. Anydocument which does not bear the common seal of thecompany is not binding on the company.
  7. 7. 6- Separation of ownership and control:- Members haveno right to participate directly in the day-to-daymanagement of a company. They elect theirrepresentatives, called directors who manage thecompany’s affairs on behalf of the members. Thus, theownership of a company is distributed amount theshareholder while management is vested in the board ofdirectors. The management of a company is delegated andcentralized.7- Voluntary association: - A joint stock company is avoluntary association of certain persons formed to carryout a particular purpose in common. Members of acompany can join it and leave it at their own free will.
  8. 8. 8- Artificial legal person: - A company is an artificial personcreated by law. Its exists only in contemplation of law. It iscontemplation to enter into contracts and to own property inits own name. But it does not take birth like a natural personand it has no physical body of a natural human being.9- Corporate finance:- The share capital of a company isgenerally divided into a large number of shares of small value.These shares are purchased by a large number of people fromdifferent walks of life.10-Statutory regulation and control:- Government exercisecontrol through company law over the management of jointstock companies. A company is required to comply with severallegal formalities and to file several documents with theRegistrar of Companies.
  9. 9. Distinction between Company and Partnership Both company and partnership are associations ofpersons but the two differ in the following respects.1. Formation and registration:- A company is created by law while partnership is the result of an agreement between the partners. In the formation of partnership no legal formalities are involved and registration of the firm in not compulsory. A company can be formed only after fulfilling legal formatives and its incorporation under the Act is essential.2. Number of members:- The minimum number of partners in a partnership firm is two and the maximum is 10 in banking business and 20 in other businesses. In a private company, the minimum number of members is 2 and the maximum is 50. In a public company minimum number of members is 7 and there is no maximum limit prescribed by law.
  10. 10. 3.Legal status:- A company has separate legal entityindependent of its members but a partnership firm has noseparate legal entity different from its partners. Partnersand the firm are one and the same in the eyes of law.Property of a partnership firm is the joint property ofpartners. In a company members are not joint owners of itsproperty.4.Liabilities of members:- In a joint stock company theliability of every member is usually limited to the unpaidmoney on the shares held or the amount of guaranteegiven by him. But in partnership, partners are jointly andseverally liable to an unlimited extent.

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