ICom Notes Class XI Principles of Commerce Joint Stock Company

If you want to view other notes of Commerce Click Here.

Joint Stock Company

DEFINITION

In the modern times the business and industry has been developed on a large scale the capital required for such industry and trade is huge which cannot be accumulated either in a sole proprietorship or a partnership organization. As a result of this change, a new form of organization has become quite popular in modern times which are known as Joint Stock Company. It is normally defined as;

“An association of many person who contribute money or money’s worth to common stock or employ it in some trade and business, and who share profit or loss arising from there.”

It means the joint stock company is a voluntary association of individual who contribute their money or profit to a common stock for carrying on a particular business. The money or money’s worth contributed by the member known as ‘share holders’ forms the capital of the company. The capital is divided into numbers of unit called share. Each share carries definite face value and is transferable in the market without any restriction or formalities.

A company as soon as incorporated takes a legal entity distinct from the share holder who composes it. It is managed by a group of persons known as directors. Directors are the representatives of share holders.

FORMATION OF JOINT STOCK COMPANY

All the joint stock companies whether public or private are governed by the company’s ordinance 1984 and must be formed according to the procedures laid down in that act. For the formulation of Joint Stock Company the following document must be submitted to the registrar, joint stock Company;

1. The list of directors along with their address.
2. The memorandum of association on which at least 7 person, who are promoters should sign in case of public limited company and two in case of private limited company. In addition of this it is also essential for the, to purchase the qualification share.
3. Articles of association duly signed as memorandum of association.
4. The consent of all the directors to act as directors.
5. A formal declaration by the secretary that all the formalities are duly completed.
6. A statement of normal capital.

Along with the above documents, registration fees, which varies with the amount of share capital is paid off to the treasury.

When the registrar of the joint stock companies is satisfied from all the formalities he will enter the name of the company in the register and will issue a certificate of incorporation. Now the company will have its separate existence.

CLASSES OF COMPANIES

There are following classes of Joint Stock Company:

1. CHARTERED COMPANY
2. STATUTORY COMPANY
3. REGISTERED COMPANY

…………(A) LIMITED COMPANY

………………….(I) PRIVATE LIMITED COMPANY

………………….(II)PUBLIC LIMITED COMPANY

……………………………….. * COMPANY LIMITED BY GUARANTEE

……………………………….. * COMPANY LIMITED BY SHARES

………..(B) UNLIMITED COMPANY

1. CHARTERED COMPANY

This type of company was formed in England and many other European countries before the passing of company acts. They are called chartered companies because they created by the royal charter of sovereign of a country. Such companies are rarely formed in present days. The chartered bank of England, the chartered mercantile of India, the imperial bank of east India Company has been formed under such chartered. In such companies the share holder are not responsible for the debt of the company. It can be dissolved by the king. After the passing of the companies Act such companies began to register under companies Act.

2. STATUTORY COMPANY

They are formed under the special act of the legislature. These are not regulated by the companies act. The special act of the legislature under which they are formed gives them monopolistic power to trade in the particular field of operation. Government took the initiative and created national bank of Pakistan, P.I.B.C and state bank of Pakistan etc. its functioning is more or less the same as the registered companies. Government controls more of the share than the public. Other example of this company are P.I.A etc.

3. REGISTERED COMPANY

This is most common form which is created under companies act. Before a registered company can be formed certain legal formalities are required to be completed and documents are to be filled with the registrar of the joint stock companies of the providence. In Pakistan these companies are incorporated under the company’s ordinance. It is of two types.

a) UNLIMITED COMPANIES

These companies are registered under the companies act. The labializes of share holder of such companies is unlimited. An unlimited company can take numerous members. It has a separate entity and is managed by the board of directors and its share is freely transferable.

b) LIMITED COMPANIES

The liabilities of the members of limited company is limited by the total value of the share they hold or by the amount they have promised to contribute in the event of liquidation of the company. It is of two types.

i) PRIVATE LIMITED COMPANY

It is composed of at least two members and in no case can the number of its member exceed 50. It cannot issues share or debenture. It share cannot be transferred to other.

ii) PUBLIC LIMITED COMPANY

It is formed by at least 7 members but there is no limited to the number of people. It can issue prospectus in order to sell its share in the market. Its share is transferable to others

It has two types:

• Company Limited by Share The liability of the shareholder of the company limited by the share is limited to the extend of the face value of the share held by them.
• Company Limited By Guarantee The members of such company undertake to shoulder a definite amount of extra liability over and above the total value of the share they hold.

MEMORANDUM OF ASSOCIATION

The first thing in the formation of joint stock company is the preparation of memorandum of association. It is the document which sets out the constitution of the company and as such is really the foundation on which the structure of company rests. That is why this document has often being called the charter of the company in its relation to the outside world. The document is prepared by the promoters of the company. It must contain the following clauses.

1. NAME CLAUSE

In this clause the full name of the company is shown and the last word of the name of the company must be limited. The company can adopt any name but there are certain restriction and the words like “ROYAL, IMPERIAL, EMPIRE, ESTATE’ etc cannot be used without the special permission of the government.

2. OBJECT CLAUSE

This clause is very important one must be very carefully drafted as it determines the activities of the company. Here each and every detail of activities of the business to be carried out must be laid down. Once the object clause is completed it becomes very difficult to make any amendments. The value of the share the utmost money must be given in detail.

3. SITUATION CLAUSE

This act provides that the company must have a registered office so that registrar may be able to send notice etc. to the company at the registered office.

4. LIABILITY CLAUSE

A declaration that the share holder liability is limited.

5. CAPITAL CLAUSE

This clause must contain a statement as to the amount of capital with which the company proposes to be registered and the division therefore into share at certain fixes amounts.

ARTICLES OF ASSOCIATION

This is an important document which must be prepared and filled with the registrar of the company. It contains rule and regulation regarding the internal work and management of the company. It defines the power, rights, and duties of directors, share holders and other officer of the company. The purpose of this document is to carry out the object set out in the memorandum. The memorandum limits the jurisdiction beyond which the article of association cannot go. It states how general meeting are to be held, how the voting is to be done. How the shares are to be transferred, and how they are to be forfeited, how accounts are to be kept. If the company does not prepare the article of association than it can adopt its table A of company ordinance.

The article must be seriously drafted, seriously numbered and printed and then filed with the registrar of Joint Stock Company. The article must be signed by the subscriber and witness as in the case of memorandum. It is usual to print memorandum and article in one booklet, as the company required to provide the copies to members on request.

DIFFERENCE BETWEEN MEMORANDUM AND ARTICLE OF ASSOCIATION

MEMORANDUM OF ASSOCIATION

1. It is charter of company which defines the powers objects of the company.
2. It is difficult to alter. Its alteration requires confirmation of the court.
3. It must be signed by at least 7 subscribers.
4. It must be registered before incorporation of the company.
5. It is not subjected to article.
6. It governess the relationship of the company with outside world.

ARTICLES OF ASSOCIATION

1. It contains rule and regulation regarding the internal work and management of the company. It defines the power, rights, and duties of directors, share holder.
2. It can be altered by passing special resolution in a general meeting.
3. It must be signed by at least 2 subscribers.
4. It may or may not t be registered before incorporation of the company.
5. It is subjected to memorandum.
6. It governs the them. Relationship of members among.

DIFFERENCE BETWEEN PRIVATE AND PUBLIC LIMITED COMPANIES

1. NUMBER OF SHAREHOLDERS

In private limited company minimum number of share holder is 2 and maximum is 50 but in a public limited company the minimum number of share holder is 7 and there is no limitation on the maximum number which may increase to thousand.

2. SUBSCRIPTION OF SHARES

A private limited company cannot invite the general public for the purchase of share and debentures. But a public limited company can invite the general public for the purchase of share and debentures.

3. DIRECTORS

A private limited company may or may not have directors; there is no restriction on it. But in case of public limited company there must be at least three directors. There is no limitation fixed for the appointment of directors.

4. CONSENT PARTNER

If there is partner in private company his written consents are not required but in case of Public limited company, his written consents are required.

5. CERTIFICATE OF INCORPORATION

A private limited company can start the business without registration or incorporation certificate but public limited company cannot start without registration.

6. PROSPECTUS

A private limited company can issue a prospectus or statement in lieu of prospectus. But it is necessary for the public limited company to issue a prospectus or statement in lieu of prospectus.

7. AUDIT OF ACCOUNT

The account of private limited company may be checked by any person, or by the body of the company. But the accounts of public limited company must be audit by chartered accountants or registered accounts.

8. ADVERTISING ACCOUNTS

It is not necessary for the private limited company to advertise the copy of balance sheet and profit or loss account every year. But for public limited company it is necessary to advertise the copy of balance sheet and profit or loss account every year.

9. STATUTORY MEETINGS

It is not necessary for the private limited company to call a statutory meeting. But statutory meeting must be called within 6 months from the commencement of the business in public limited company.

10. APPOINTMENT OF MANAGING AGENTS

Managing agent in private limited company can be appointed for a period, but managing agent in the public limited company can be appointed for the 20 years at-most.

11. QUALIFICATION OF SHARE FOR DIRECTORS

In private limited company there is no qualification of shares for directors but in public limited company a person will have to purchase qualification share for becoming the director of company.

12. CONDITION OF MINIMUM SUBSCRIPTION

The condition of minimum subscription is not applicable for private limed company. But for the public limited company the minimum subscription must be raised before the almost of shares of the general public.

ADVANTAGES OF JOINT STOCK COMPANY

1. HUGE AMMOUNT OF CAPITAL

It is in position to raise large amount of capital required for big business. The reason is the limitation of liabilities and ease of transferability of share. A small value of share allows charge number of people to invest. Therefore large capital can be raised by Joint Stock Company.

2. ALL PEOPLE CAN INVEST

The shares are of different kinds and they are purchased by person of different temperaments. The small value of share allows the poor people to also purchase it. Besides the company can also raise fiancé by the issue of debentures and bonds.

3. LIMITED LIABILITIES OF SHAREHOLDERS

The liabilities are limited. It means that the risk is spread over a large number of share holders and possibility of hardship on few is reduced. Secondly if the business is lost the shareholder are not going to loose anything from their private properties.

4. EFFICIENT MANAGEMENT

The management is carried out by the people who are able, experienced and trustees of share holders. It is thus in the hand of few exporters. secondly the company can also hire efficient and qualified staff since it can pay their wages.

5. STABILITY OF BUSINESS

The success of business also depends upon the life of the business. The joint stock company is more suited in this respect, for a company is a legal person having a perpetual succession.

6. EASE OF EXPANSION:

In joint stock Company if it is desirable to expand the business it can be easily done by the issue of more and more shares.

7. EASY TRANSFERABILITY OF SHARE:

The share of company are easily bought and sold in stock exchange market like ordinary commodities, and the shareholder can withdraw his money when ever required by selling his shares to others. This fact encourages the public to invest money.

8. LEGAL ENTITY

The company has legal entity distinct from the shareholders. The company can enter into any contract with any person on behalf of the company’s name.

9. TAX CONCESSIONS

The income tax has provided special concession to joint stock companies which are not available to sole proprietorship or partnership organization.

10. MASS PRODUCTION

The greatest benefit of the joint stock companies is that it has made possible production on larger scale. Modern and mass production needs huge capital which can be accumulated in such a form to business organization.

DISADVANTAGES OF JOINT STOCK COMPANY

1. DIFFICULTY IN FORMATION

The promoters has to under go under certain legal formalities to create the business. They have to prepare and file the necessary documents and pay the registration fee.

2. SEPARATION OF OWNERSHIP FROM CONTROL

The management of the company is entirely in the hands of directors and the shareholder, who are the actual owners have no say in it. The directors may be dishonest and may deceive the public.

3. LACK OF PERSONAL INTEREST

As compared to other forms of business such organization lacks personnel interest, because the management knows that they will be paid in any condition and secondly the directors know the profit will be divided into number of share holders. This situation leads to the absence of personal interest.

4. LACK OF SECRECY

A successful requires secrecy sometimes in certain matters. Secrecy cannot be maintained here because each and every formula or terms are exposed to all the shareholders regarding the volumes at sales margin of profits etc.

5. MONOPOLY

Another danger lies in a tendency for the joint stock company to form themselves into a combination exercising monopolistic powers and monopoly is against public interest.

6. CORRUPTION

The share being easily sale able, shrewd directors sell them whenever they suspect any danger in the business and shift the loss of the company on general public.

7. DIVIDED RESPONSIBILITIES

The work of company is divided among various departments and the in charge of the company is quite independent. This sometimes causes much hardship and result in- Efficiency

8. SOURCE OF DECEIVING INVESTORS

By forming bogus companies the promoters can deceive the general public.