The Characteristics of a Joint Stock Company are as follows
A Joint Stock Company is a voluntary association of persons to carry on the business. It is an association of persons who contribute money which is called capital for some common purpose. These persons are members of the company. The proportion of capital to which each member is entitled is his share and every member holding such share is called shareholders and the capital of the company is known as share capital. The Companies Act 1956 defines a joint stock company as an artificial person created by law, having separate legal entity from its owner with perpetual succession and a common seal. Shareholders of Joint Stock Company have limited liability i.e liability limited by guarantee or shares. Shares of such company are easily transferable. From the above definition the following characteristics of a Joint Stock Company can be easily identified:
1. Incorporated association:
A company is called an incorporated association because it comes into existence only after registration. Whereas in other forms of business ownership — sole proprietorship and partnership — registration is not compulsory.
2. Minimum Number of Members:
Forming a public company at least 7 persons and for forming a private company at least 2 persons are required. If not registered it would be treated as illegal association.
3. Artificial legal person:
A company is a creation of law and is called an artificial person. It exists only in the contemplation of law, and therefore, has no physical form. However, law grants it the right to act as a natural being — through a board of directors elected by the shareholders.
4. Distinct legal entity:
A company is regarded as an entity separate from its members because a shareholder of a company (i) in his individual capacity cannot bind the company in any way. (ii) Can enter into contract with the company and can be an employee of the company, (iii) cannot be held liable for the acts of the company even if he holds the entire share capital.
Likewise, the company has (i) the right to own the property in any way it likes. (ii) Can sue and be sued in its own name by its members as well as outsiders, (iii) life of the company is independent of the life of its members.
The principle of separate legal entity of the company has been judicially recognized in several cases; however, the famous case of Salmon Vs. Salomon & Co. Ltd. has its distinct importance.
In this case, one Salomon converted his leather business from a sole- proprietorship into a company, taking 20000 shares for himself, and allotting one share each to his wife and daughter.
Salomon also received mortgage debentures in part payment by the company for the business. The validity of these debentures was questioned on the ground that a person can not owe to himself and that Salomon and the company were one and the same person. It was, however, decided that Salomon’s own entity was distinct from that of the company in question.
5. Perpetual succession:
A company has unending life quite independent of the life of its members. The death, insolvency, or exit of any shareholder has no effect on the life of a company. “During the war all the members of one private company, while in general meeting, were killed by a bomb.
But the company survived; not even a hydrogen bomb could have destroyed it”. The common saying in this regard is “members may come, members may go, but the company goes on forever”. Law creates it and law alone can dissolve it. However, sole proprietorships and partnerships do not enjoy uninterrupted life. The proprietary business almost comes to an end if anything happens to the proprietor.
Even when it is passed on to the successors, they may not be competent to operate it. Partnership, for instance, comes to an end on the death, lunacy, or insolvency of a partner. A partner can also put an end to partnership by retirement.
6. Common Seals:
Requires that a company must have a common seal with its name engraved on it. Any document bearing the common seal of the company, and signed by two directors, legally binds the company.
7. Transferability of shares:
The capital of a company is divided into parts, called shares. There shares of the company are transferable. In a public company this right of transfer is absolute. In a private accompany, however, some restrictions on the right of transfer of shares are imposed through its articles.
8. Limited liability:
The liabilities of a shareholder of a company are usually limited. For satisfaction of the debts of the company, the personal property of the shareholder cannot be used. A shareholder’s liability is limited to the amount unpaid on their shares, irrespective of the magnitude of losses suffered. In case of a guarantee company, however, the members are liable to contribute a specified agreed sum in the event of the company being wound-up.
In case of sole proprietorship and partnership the positions different. In sole-proprietorship, the liability of the owner is unlimited, that is, even to the extent of his personal possessions. The nature of partners’ liability is also the same. The liability of partners is both individual and collective. The creditors have a right to recover the firm’s debts from the private property or one or all partners, where firm’s assets are insufficient.
Article Shared by Smriti Chand