Everything you need to know about the features and characteristics of a joint stock company. “A Company is a voluntary association or organization of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business and who share the profit or loss arising therefrom”- James Stephensen.
A more comprehensive definition will, however, be one that indicates all the essential features of a company.
As an attempt in this direction, a company may be defined as an artificial person (being an association of natural persons) recognised by law, with a distinctive name, a common seal, a common capital comprising transferable shares of fixed value carrying limited liability, and having a perpetual (continuous, uninterrupted) succession.
Some of the distinctive features of a joint stock company are:-
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1. Legal Formation 2. Artificial Person 3. Separate Legal Entity 4. Common Seal 5. Perpetual Existence 6. Limited Liability 7. Separation of Ownership and Management 8. Voluntary Organisation 9. Legal Formation 10. Large Capital 11. Transferability of Shares
12. Risk Bearing 13. Compulsory Incorporation 14. Large Number of Members 15. Reasonable / Lower Tax Liability 16. Enterprising Management 17. Public Confidence 18. Social Benefits 19. Incorporated Association 20. Statutory Compliance 21. Nature of Business 22. Registration and a Few Others.
Features and Characteristics of a Joint Stock Company: Legal Formation, Artificial Person, Risk Bearing and a Few Others
Features of a Joint Stock Company – 8 Distinctive Features: Legal Formation, Artificial Person, Separate Legal Entity, Common Seal, Perpetual Existence and a Few Others
The distinctive features of a company may be listed thus:
Feature # i. Legal Formation:
A company is an incorporated or registered association of individuals. No single individual or a group of individuals can start a business and call it a joint stock company. You need at least 7 persons to start a public limited company and at least 2 to start a private limited company. A joint stock company can come into existence only when it has been registered after completing all the legal formalities under the Indian Companies Act, 1956.
Feature # ii. Artificial Person:
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A company has an artificial personality of its own, recognized by Law. It is invisible and intangible. Everything a company does, is regulated by law. It has a personality of its own only in the eyes of law—which cannot be seen. In short, a company’s birth, existence and death are regulated by Law and no one else.
Feature # iii. Separate Legal Entity:
Being an artificial person, a joint stock company has a personality and existence of its own that is independent of its investors. This means that a joint stock company can own property, enter into contracts and conduct any lawful business in its “own” name. It can sue and can be sued by others in the court of law. The shareholders are “not” the owners of the property owned by the company. Also, the shareholders cannot be held responsible for any of the acts of the company.
Feature # iv. Common Seal:
A joint stock company has a “seal”, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organization working on behalf of the company. Any document, on which the company’s seal is used and is duly signed by any designated official of the company, becomes legally binding on the company.
Feature # v. Perpetual Existence:
A joint stock company continues to enjoy continuous and uninterrupted existence as long as it satisfies the requirements of law. It remains unaffected by the death, lunacy, insolvency or retirement of any of its investors. For example, in case of a private limited company having four members, if all of them die in an accident, the company will “not” be closed. It will continue to exist.
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The shares of the company will be transferred to the legal heirs of the members. In other words, members may come and go but the company continues to play its innings on the field for ever—till it is wound up. Since a company is created by Law, it can be put to rest only through a winding up process as prescribed under Law.
Feature # vi. Limited Liability:
The liability of a member in a joint stock company is limited. For example if a person has invested Rs. 10,000 then only this amount can be used to pay off the debts of the company—in case the company is going to be liquidated. A member cannot be asked to pay more than what is due from him in respect of shares allotted to him if the assets of a company are not enough to meet the claims of all creditors.
Feature # vii. Transferability of Shares:
The shares of a public limited company are freely transferable. They can be purchased and sold through the stock exchange. Members can transfer their interest to others without any restrictions or permission from other members.
Feature # viii. Separation of Ownership and Management:
A joint stock company has a large number of shareholders at any point of time. They cannot obviously participate in the day to day affairs of a company. So members elect their representatives -known as directors—who are given enough powers to run the show independently. There is, thus, separation of ownership from management which permits the use of professional talent to run the show in a democratic and independent manner.
Features of a Joint Stock Company – Artificial Person, Separate Legal Existence, Legal Formation, Voluntary Organisation, Perpetual Succession, Large Capital and a Few Others
The main characteristics or features of a Joint Stock Company are:
1. An Artificial Person:
A Joint Stock Company is an artificial person created by law with no physical form or shape of a human being. It can own properties, enter into contracts and performs all business operations in its own name. It is not a natural person with physical characteristics and hence called an artificial person but these operations are conducted by elected representatives from its voluntary members known as directors.
2. Separate Legal Existence:
A Joint Stock Company is a separate legal entity. Any shareholder of a company can enter into a contract with the company. A company can possess properties, can open its own bank account and perform many such activities which a living person can do. Thus, a company is independent of its owners or members.
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3. Legal Formation:
The formation of a Joint Stock Company is governed by the rules and regulations laid down in the Companies Act, 1956. The company can be registered after completion of several formalities by an individual or a group of individuals. It comes into existence through operation of law. Registration of a company is considered to be a time consuming, expensive and complicated process.
4. Voluntary Organisation:
It is formed by members voluntarily joining the organisation and contributing money or money’s worth for the business. A company can neither compel a person to become its member nor to give up his or her membership. It is the personal choice of a person, be it his or her desire to earn profit or some other objective, which inspires them to become members of the company.
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5. Perpetual Succession:
Unlike Sole Proprietorship and Partnership, the Company has continuous existence. The continuity of the business is not affected by the death, insolvency or insanity of any member. The members may come and members may go, but the company goes on until it is wound up according to law. Perceptual succession lends stability and long life to a company as compared to other forms of business organisation.
6. Limited Liability:
The liability of a member of a company is restricted to the number of shares purchased by him. The members can be asked to contribute to the losses only to extent of their capital contribution. The members are not liable to the actions of the business, and in case of losses, the creditors can claim assets of the company except the personal assets of the members.
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7. Large Capital:
A Joint Stock Company can generate huge amount of money towards capital, because the number of persons contributing towards capital are more in number as compared to Sole Proprietorship or Partnership organisation.
8. Transferability of Shares:
The capital of a Joint Stock Company comes from issuance of shares of definite value. According to Section 44 of the Companies Act, each shareholder is free to transfer his shares.
9. Common Seal:
The Joint Stock Company, being an artificial entity, has a common seal. The common seal is used in place of an official signature. The name of the company is imprinted on its stamp. A contract carried on without the common seal is not binding on the company.
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Features of a Joint Stock Company – 8 Features: Artificial Person, Separate Legal Entity, Formation, Perpetual Succession, Control, Liability, Common Seal and Risk Bearing
Like natural persons, a company can own property, incur debts, borrow money, enter into contracts, sue and be sued but unlike them it cannot breathe, eat, run, talk and so on. It is, therefore, called an artificial person.
On incorporation, a company acquires a separate legal existence in the eyes of law. The assets and liabilities of the company are separate from those of its owners.
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The formation of a company is a time consuming, expensive and complicated process. It involves the preparation of several documents and compliance with several legal requirements before it can start functioning. Registration of a company is compulsory as provided under the Indian Companies Act, 1956.
Being distinct from the members, the death, insolvency, or retirement of its members does not affect the life of the company. Member may come and go, but the company goes on forever. It will only cease to exist only when specific procedure of winding up is followed.
The management and control of the affairs of the company is undertaken by the Board of Directors, which appoints the top management officials for running the business. The shareholders do not have the right to be involved in the day-to-day running of the business.
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The liability of the members is limited to the extent of the capital contributed by them in a company. The creditors can use only the assets of the company to settle their claims. The members can be asked to contribute to the loss only to the extent of the unpaid amount of share held by them.
For example, A is a shareholder in a company holding 2,000 shares of Rs. 10 each on which he has already paid Rs. 7 per share. His liability in the event of losses or company’s failure to pay debts can be only up to Rs. 6,000 — the unpaid amount of his share capital (Rs. 3 per share on 2,000 shares held in the company). Beyond this, he is not liable to pay anything towards the debts or losses of the company.
The common seal is the engraved equivalent of an official signature. The Board of Directors enters into an agreement with others by indicating the company’s approval through a common seal. Company is bound by only those documents which bear its signature.
The risk of losses in a company is borne by all the shareholders to the extent of their shares in the company’s capital. The risk of loss thus gets spread over a large number of shareholders.
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Features of a Joint Stock Company – 7 Chief Characteristics of the Company Form of Organisation
Following are the chief characteristics of the company form of organisation:
Characteristic # 1. Artificial Person:
A company is a creation of law. It is treated as an ‘artificial person’ having no physical shape. Although a Joint Stock Company is invisible and intangible as a legal person, a company enjoys almost all the rights of a natural person. It can enter into contracts with other parties, purchase and sell assets and property, appoint persons as executives, employees, etc.
Characteristic # 2. Separate Legal Entity:
A company has a legal entity being separate from its members. A company acts independently of its members. The company is not bound by the acts of its members. The company is not bound by the acts of its members nor do the members act as its agents. Like an individual it can enter into contracts and own property. It can sue and can be sued.
Characteristic # 3. Limited Liability:
The liability of a member (shareholder) of a company is limited. Limited liability means a shareholder remains liable for the debt of the company of which he is a member to the extent of amount of nominal value of shares the member has subscribed to.
Characteristic # 4. Perpetual Succession:
A company enjoys perpetual succession because it enjoys independent life of its own. It is a corporate body and is separate from its members. So the death of a member does not hamper its life.
Characteristic # 5. Common Seal:
Since a company is an artificial person in the eyes of law, it must have its own common seal on which its name is engraved in a special style. Common seal serves as the company’s signature. It has to be kept in safe custody of the company’s Secretary or any of its Directors. The common seal signifies company’s legal entity.
Characteristic # 6. Transferability of Shares:
The members of a public company have a right to transfer their shares freely in the manner as laid down in the Articles of Association of the company. However, the members of a private company do not get this privilege.
Characteristic # 7. Separation of Ownership from Management:
In a company organisation ownership rests with the shareholders, whereas management of its affairs is in the hands of Board of Directors. This is so because it is not possible for a large body of shareholders spread over a wide area to meet every now and then for the business of the company. Therefore, shareholders appoint their representatives as Directors to manage the company’s affairs. All Directors are collectively known as the Board.
Features of a Joint Stock Company – Artificial Legal Person, Compulsory Incorporation, Perpetual Succession, Common Seal, Distinct Legal Entity and a Few Others
1. An Artificial Legal Person:
A company is created by law for achieving the objectives for which it is formed. It is called an artificial person because it is a creation of law. It has no body, no soul, and no conscience. That means it does not possess the physical attributes of a natural person. It is invisible, intangible, immortal and exists only in the eyes of law. It can enter into contract, can employ the employees. Like a natural person it has rights and obligation it terms of law.
A separate legal entity is unique feature of a company which distinguishes it from a sole proprietorship and partnership firm, both of which do not have independent legal existence.
2. Compulsory Incorporation:
A Joint Stock Company is created by registering or incorporating an association of persons under the prevalent Companies Act or in case of a statutory corporation, under a special act of the legislature.
3. Perpetual Succession (Life):
A company is an artificial person, created by law and can enjoy individuality. It has a continuous existence and its life is not affected by the death, insolvency, lunacy or retirement of its members or directors. The members may come and go, but the company continues its operations so long as it fulfills the requirements of the law under which it has been formed. Its formation is voluntary but continuance is compulsory. A company has a perpetual succession irrespective of its members.
4. Common Seal:
A company is an artificial person created by law. That is why it cannot sign documents for itself, whereas, a natural person having body and soul can do. The law has, therefore, provided for the use of a common seal, with the name of the company engraved on it, as substitute for its signatories.
This common seal acts as its signature. It is affixed on all important legal documents and contracts. A document bearing the common seal of the company and duly witnessed (signed) by at least two directors will be legally binding on the company. Common seal is in the custody of the Board of Directors.
5. Distinct Legal Entity:
A company is considered to be legal person and can continue to exist even though its ownership changes many times. As legal entity a company has the right to own and transfer the title to property in any way. It can own property. The members of the company can either individually or jointly claim proportionate ownership sued right in the assets or property of the company during its existence or it’s winding up.
A company can sue and can be sued in its own name by its members as well as outsiders. The creditors of the company are the creditors of the corporate body and they cannot proceed against the members personally.
6. Limited Liability:
Every member’s liability in a limited company is limited to the face value of shares subscribed to or the amount of guarantee given by him. Members cannot be asked to pay more than the face value of shares for paying the creditors of the company even in the event of its winding up. The personal / private property / assets of the members of the company are always safe and free from company’s liability.
7. Transferability of Shares:
The members of a public limited company can freely transfer the shares held by them to anyone else. Such transfer can be done without taking consent of other members or without causing closure of the company. The stock exchange plays a very important role in sale and purchase of the shares.
The shares of company are movable property and are transferable in the manner laid down in articles of association of the company. Free transferability and good marketability of securities are considered as distinguishing features of a company in comparison to sole trader or partnership firm.
8. Separation of Ownership from Management:
In a company form of organisation, ownership is separated from management. Owners are shareholders of the company and management have the professional managers who are not necessarily the owners of the company.
Moreover the members of the company are in large number and most of them cannot participate in the day-to-day management of the affairs of the company. The members elect their representatives in the form of Board of Directors in annual general meeting of the company. This board of Directors looks after the management of the company.
9. Large Number of Members:
In a public company there is no restriction on maximum number of members. Huge capital, thus, can be raised. Even a common man can invest his money in a large company and can enjoy the benefits of such company.
10. Distribution of Risk or Loss:
In a public limited company members are in large number. The total risk of loss due to failure of business is spread over a very large number of members. A member of a public limited company has to bear a very low risk of loss, which is limited to the face value of his shares.
11. Larger Capital Mobilisation:
The important features of a company, namely limited liability, easy transferability of shares and unlimited membership, help in mobilising a vast amount of capital for the company. In comparison to sole trader and partnership firm, the capital raising capacity of a company is tremendously higher or larger.
12. Reasonable / Lower Tax Liability:
In the sole proprietorship and partnership form of business organisation owners have to pay income tax at very high rate directly. There are progressive income tax rates on personal incomes. But in case of company which is an independent legal person and on corporate legal entities there is a fixed rate of tax called as corporate tax. As well as many tax incentives are given to corporate enterprises reducing the actual tax base appreciably.
13. Enterprising Management:
One of the important features of the company is that a company can undertake a huge risk of loss. Management is separated from ownership therefore, a company management can afford adventurous and risky business and can earn more profit.
14. Public Confidence:
Since formation to dissolution or winding up every activity of a company takes place according to the provisions of the company Act 1956. It is obligatory to the company to get their books of accounts audited by a qualified auditor (C.A.) and to publish the same. The Directors Report is also legally required to be published. All these help to create and promote the public confidence.
15. Social Benefits:
A company is an effective tool of mobilising the scattered savings of the community and investing them in different commercial and industrial enterprises. It offers employment opportunities to the people in the society. It produces large quantity of goods and services of the best quality and provides the same to community at a reasonable price.
It helps improving the standard of living by offering variety of goods and services to the community. It contributes the largest amount of revenue to the government, through the direct and indirect taxes.
Features of a Joint Stock Company – Separate Legal Entity, Limited Liability of Members, Perpetual Existence and Common Seal as a Substitute for Signatures
A more comprehensive definition will, however, be one that indicates all the essential features of a company. As an attempt in this direction, a company may be defined as an artificial person (being an association of natural persons) recognised by law, with a distinctive name, a common seal, a common capital comprising transferable shares of fixed value carrying limited liability, and having a perpetual (continuous, uninterrupted) succession.
1. Separate Legal Entity:
The above definitions of a company (or corporation) begin by asserting that a company is an artificial person. Negatively put, it means that a company is not a natural person. Positively, it implies that a company has an entity of its own recognised by law quite distinct from that of the natural persons forming it. “It is created for the purpose of enabling a group of persons to conduct some activity in a more convenient way than would be possible by retaining their identity as individuals.”
The artificial person, or the legal entity that a company is recognised to be, has many of the rights of a natural person. It can sue and be sued in its own name. A shareholder being an entity distinct from that of the company can sue the company and be sued by it. Similarly, the company has the right to own and transfer the title to property.
A shareholder cannot be held liable for the acts of a corporation even if he owns all or virtually the whole of its stock. The decision of the House of Lords in Salomon vs. Salomon and Co. (1897) has historical significance in this connection. In this case, one Salomon converted his leather business from a sole proprietorship into a company, taking 20,000 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 challenged on the ground that a person cannot owe to himself and that Salomon and the company were one and the same person. The House of Lords decided that Salomon’s own entity was separate from that of the company in question.
It must, however, be noted that a company, being an artificial person, does not enjoy some of the personal rights of the natural persons, nor does it suffer from their personal liabilities and obligations. Thus a company cannot marry, cannot be sent to jail, cannot take oath, cannot enter into partnership, and cannot practice a learned profession like law or medicine.
2. Limited Liability of Members:
Since the company has a separate legal entity and is recognised as an artificial person existing in the eye of law, its debts are its own, and the shareholders cannot be held liable for them under ordinary circumstances. A shareholder is liable only to pay for his own share in the company.
If he has paid Rs.50 towards a share off Rs.100, his liability extends only up to further Rs.50. Howsoever bad the financial position of the company might be, no shareholder can be called upon to pay more than the face value of the shares standing in his name.
3. Perpetual (Uninterrupted) Existence:
The company, according to Blackstone, may be compared with a river which retains its identity though the parts which compose it are constantly changing. Simply stated, it means that the company has a continuous existence which is not affected or interrupted by the death, insolvency or retirement of any shareholder or director.
The shares of a company may change hundreds of hands on the stock exchange, but the life of the company remains unaffected by such changes. This is a characteristic which lends stability and long life to a company as compared to other forms of organisation.
4. Common Seal as a Substitute for Signatures:
A company, not being a natural person, cannot sign documents for itself. The common seal with the name of the company engraved on it is, therefore, used as a substitute for its signatures. The common seal is kept in safe custody by the secretary of the company and is used in accordance with the directions of the Board of Directors. When it is affixed for the company on any document, it has to be witnessed by two directors.
Features of a Joint Stock Company – Incorporated Association, Separate Legal Person, Separate Legal Entity, Perpetual Existence, Common Seal and a Few Others
Feature # 1. Incorporated Association:
A company must necessary be incorporated or registered under the prevalent Companies Act. Registration creates a joint stock company and it is compulsory for all the association or partnership, having membership of more than ten in banking and more than twenty in any other trading activity, formed for carrying on a business with an object or early profits.
Feature # 2. Artificial Legal Person:
A company is an artificial legal person in the sense that on the one hand, it is created by a process other than natural birth and does not possess the physical attributes of a natural person, and on the other hand, it is clothed with many of the rights of natural person; It is indivisible, intangible, immortal (law along can dissolve it) and exists only in the eyes of law.
It has no body, no soul, no conscience, neither it is subject to the imbecilities of the body. It is because of these physical disabilities that a company is called an artificial person.
But it cannot be treated as “fictitious” entity because it really exists. As a rule, a company may acquire and dispose of property. It may enter into contracts through the agency of natural person, may be defined for the contravention of the provision of the Companies Act. Thus, for most legal purpose, a company is legal just like a natural person, who has rights and duties at law.
In short, it may be said, therefore, that a company being an artificial legal person can do everything like a natural person, except of course that, it cannot take oath, cannot appear in its own person in the court (must be represented by counsel) cannot be sent to jail, cannot practice a learned profession like law or medicine, nor can it marry or divorce.
Feature # 3. Separate Legal Entity:
A company is a legal person having a juristic personality entirely distinct from and independent of the individual persons who are for the time being its members. It has the rights to own and transfer the title to property in any way it likes.
No member can either individually or jointly claim any ownership rights in the assets of the company during its existence or in its windings up. It can sue and be sued in its own name by its members as well as outsiders. Creditors of the company are creditors of company alone and they cannot direct proceed against the members personally.
A company is not merely the sum total of its component members, but it is something superadded to them. In mathematical language it may be defined as n + 1st person, where n stands for the total number of members and 1st person for the company itself.
Even if a shareholder owns virtually the whole of its share, the company is a separate legal entity in the eyes of law as distinguished from such a shareholder. The principle was judicially recognized by the House of Lords in the famous case of Salomon vs. Salomon & Co. Ltd.
But the House of Lords held that the existence of a company is quite independent and distinct from its members and that the company’s assets must be applied in payment of the debenture first in priority to unsecured creditors.
Lord Macnaghten observed in this case- “The company is at law a different person altogether from the subscribers to the Memorandum, and through it may be that after incorporation the business is precisely the same as it was before, and the same persons are mangers, and the same hands received the profits, the company is not in law the agency of the subscribers or trustee for them. Nor are the subscribers, as members, liable, in any shape or form, except to the extent and in the manner provided by the Act.”
The legal status of a ‘company’ has been aptly described by the Supreme Court of India in Tata Engineering & Locomotive Company Ltd. vs. State of Bihar – in these words.
“The corporation in law is equal to a natural person and has a legal entity of its own. The entity of the corporation is entirely separate from that of its shareholders; it bears its own name and has a seal of its own, its assets are separate and district from those of its members. It can sue and be sued exclusively for its own purpose; its creditors cannot obtain satisfaction from the assets of its members, the liability of the members or shareholder is limited to the capital invested by them, similarly the creditors of the members have no right to the assets of the corporation. The position has been well established ever since the decision in case of Salomon vs. Alumna & Co Ltd was pronounced in 1897 and indeed it has always been the well-recognized principle of common law.”
Feature # 4. Perpetual Existence:
A company is a stable form of business organization. Its life does not depend upon the death, insolvency or retirement of any or all shareholder(s) or director(s). The provision for transferability of shares to the successors) of the deceased in case the shareholder dies helps to preserve the perpetual existence of a company. Law creates it and law alone can dissolve it. Members may come and go but the company can go on forever.
“During the war all the members of one private company, while in general meeting, were killed by a bomb. But the company survived; not every a hydrogen bomb could have destroyed it.” The company may be compared with a flowing river where the water keeps on changing continuously still the identity of the river remains the same. Thus, a company has perpetual existence, irrespective of changes in its membership.
Feature # 5. Common Seal:
A company being an artificial person has no body similar to a natural person and as such it cannot sign document for itself. It acts through natural persons who are called its directors. But having a legal personality, it can be bound by only those documents which bear its signature.
Therefore, the law has provided for the use of a common seal, with the name of the company engraved on it, as a substitute for its signature. Any documents bearing the common seal of the company and duly witnessed by at least two directors will be legally binding on the company.
Feature # 6. Limited Liability:
The liability of the members for the debts of the company is limited to amount unpaid on their share, however heavy loses the company might have suffered. For example, if a shareholder buys 100 shares of Rs.10 each and pays Rs.5 on each share, he has paid up Rs.500 and can be made to pay another Rs.500, but he cannot be made to pay more than Rs.1000 in all.
No shareholder can be called upon to pay more than the nominal or face value of shares held by him, in case of a company with limited liability. Thus, by virtue of this characteristic the personal property of the shareholder cannot be seized for the debts of the company, if he holds a full paid up share.
Feature # 7. Transferability of Shares:
The share of a public company are freely transferable and members can dispose of their shares whenever they like without seeking any permission from the company or the others members. In a private company, however, some restriction on the right to transfer shares is essential in its articles as per Section 3(1)(iii) of the Act, but absolute restriction on the right of the members to transfer shares contained in the articles shall be void.
It may, however, be noted here that a company possess the above mentioned characteristic by virtue of its inspiration or registration under the Companies Act. Although a partnership firm- the main alternative of the company as a form of business organization may also be registered under the Indian Partnership Act, 1932, yet it does not possess by of these characteristics.
Features of a Joint Stock Company – Diffused Ownership, Democratic Management, Statutory Compliance, Registration, Conflict of Interest and a Few Others
“A Company is a voluntary association or organization of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business and who share the profit or loss arising therefrom”- James Stephensen.
Lord Justice Lindley explains that “By a company is meant an association of persons who contribute money or money’s worth to a common stock and employ it for some common purpose. The common stock so contributed is denoted in money terms and is the capital of the company. The persons who contribute it or to whom it belongs are members of the company. The proportion of capital to which each member is entitled to is his ‘share’. The shares are of fixed value and the whole capital of the company is divided into equal number of shares. The shares are generally transferable, although under certain circumstances, the right to transfer may be restricted.”
“A person – artificial, invisible, intangible and existing only in contemplation of the Law” Chief Justice Marshall.
“A Voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership” – Prof. L.H. Haney.
“An artificial person (being an association of natural persons) recognized by law, with a distinctive name, a common seal, a common capital comprising of transferable shares of fixed value carrying limited liability, and having a perpetual (continuous uninterrupted) succession” – Y.K. Bhushan
Some of the features or characteristics of a joint stock company are:-
1. Artificial Person:
A company is an artificial person existing in the eyes of Law. It is created (born) through an act of law and is wound up (dies) through an act of law. Until the time a company is wound up, it acts like any other normal person. It can enter into contracts, purchase and sell goods, own property, sue others and also get sued, just like any other natural person.
2. Separate Legal Entity:
The Company being an artificial person, it is different from its shareholders. It can enter into a contract with its shareholders. The shareholders can also start a business competing with the business of the company. Shareholders cannot represent the company. For example, a person owning 100 shares of Reliance Industries Limited is a part owner of the company.
However, he does not have any right to enter into a contract with another party stating that he is doing it on behalf of the company. The company is not responsible for such contracts as it has not entered into the contract. Share holder(s) can sue the company in a court of law. Similarly, a company can also sue some of its shareholders in court. Finally, a company can be closed down only through a legal winding up process.
3. Limited Liability:
The liability of a shareholder is limited to the extent of the money he/she has agreed to contribute towards the share capital of the company. The personal property of the shareholder cannot be claimed in satisfaction of dues from the company. To illustrate, let us say a company is formed by 2 people contributing Rs.1,000 each as capital.
The total share capital of the company is Rs2,000. The company takes a loan from a bank to the extent of Rs.5,000. The company suffers a loss and is unable to repay the bank loan. The bank would be able to sell the assets of the company towards realization of its dues. However, the bank cannot expect the 2 shareholders to pay the Rs.3,000 from their personal wealth, even if the 2 shareholders are very wealthy.
The liability of the shareholders is limited to the amount that they agreed to commit as capital. In this case, it comes to Rs.1,000 for each of the shareholders.
4. Transferability of Shares:
He/ she can simply transfer the shares owned by him/her to any other person. As a result, the person who purchased the shares becomes the part owner of the company in place of the person selling the shares. The company is not effected in any manner on account of such a transaction. However, in some cases, there can be some restrictions on the free transferability of shares.
5. Perpetual Existence:
A company continues to be in existence until it is wound up. We have often heard/ read about companies which are 200 years old. Thus, life of the company is not related to life of shareholders. In the event of death of a shareholder, the shares get transmitted in favour of his children or family members. Shareholders may die or leave the company, but the company does not die, until it is wound up.
6. Ownership and Management is Separate:
Shareholders are the owners of the company. However, all shareholders cannot involve themselves in the management of the company. Shareholders elect the people who are authorized to manage the company. Professionals might be recruited for the purpose. Thus, owners and managers are different people.
7. Diffused Ownership:
A company is owned by its shareholders. Unlike a proprietary concern or a partnership firm, shares are held by a large number of people. For example, there are more than 30 lakh shareholders in Reliance Industries Limited. The share of each shareholder in the share capital of the company is very small.
8. Democratic Management:
The management of the company is very similar to how the country is managed. All citizens of the country elect their representatives in the form of MLAs/ MPs. These elected representatives debate on various aspects of national importance. Decisions are taken on the basis of majority rule.
Similarly, shareholders elect their representatives known as “directors”. All decisions are taken by directors or shareholders, based on the “majority rule”. Some decisions may require a simple majority while some other critical decisions may need a special 2/3rd majority. Thus, the affairs of the company are democratically managed.
9. Statutory Compliance:
The operations of a company form of business are strictly governed by the provisions of companies Act, 1956 and other laws being brought into force from time to time. Non-compliance with the provisions of the law attracts heavy penalty. Even closure of the company is as per the winding up provisions of the Companies Act.
10. Nature of Business:
A company can engage itself in only such businesses that have been explicitly stated in a document called “Memorandum of Association”. Thus, a Hotel company cannot start a Cement factory, if it is not mentioned in the Memorandum of Association. The area of operations of a company are thus, limited.
11. Common Seal:
A company can enter into agreements and contracts through its representatives. A seal is embossed in the documents, which signifies the acceptance of terms of contract by the company. Thus, the ‘common seal’ is the Signature of the company.
12. Number of Persons:
A minimum of two persons are required to start a company. The maximum number of shareholders cannot exceed 200 in case of a Private Limited Company. In case of a Public limited company, a minimum of 7 members are required and there is no maximum limit.
13. Registration:
Registration is compulsory for a Joint Stock Company. All companies have to be registered with Registrar of Companies as per the provisions of Companies Act, 2013. A company continues to exist in the eyes of the law unless it is subject to the Winding up provisions of the companies Act.
14. Voluntary Association of Anonymous Persons:
A company is an association of persons, who have come together for a common objective. However, many times, the shareholders who have come together do not even know each other. This is particularly true in case of public limited companies.
For example, there are 30 lakh shareholders of Reliance Industries Limited, from different parts of the country. There is nobody who knows everybody else in the company. Yet, they have come together as partners in a business with the intention of making profit.
15. Public Accountability:
A Joint stock company is required to meet many statutory requirements with respect to maintenance of accounts and publication of financial statements. Its financial statements are made available to the general public at the Registrar’s office. Any person who wishes to examine the financial statements of a company can do so by paying a nominal amount of money to the Registrar.
16. Conflict of Interest:
A company has many stakeholders. There are shareholders who manage the company. There are directors who are elected by shareholders. There are people who are working for the company. This situation can lead to potential conflicts of interest between the stakeholders.
17. Sources of Funds:
A company form of business has access to larger number of potential investors. Thus, it can raise potentially a much larger amount of funds for its activities. There are different kinds of financial instruments through which a joint stock company can raise funds.