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Joint Stock Company

A company can be defined as an association of persons formed for carrying out business activities wherein it has a legal status independent of its members. This form of organisation is governed by The Companies Act, 1956. A company can also be described as an artificial person possessing a separate legal entity, perpetual succession and a common seal. The owners of the company are the shareholders while the Board of Directors form the chief managing body elected by the shareholders. Generally, the owners exercise an indirect control on the business. The capital of the company is divided into small portions called 'shares' which are transferable freely from one shareholder to another person (this is not applicable in a private company).


The characterization of a joint stock company highlights the following features:
  1. Artificial Person: A company can be defined as a creation of law and is not dependant on its members. Like natural persons, a company can own property, incur debts, borrow money, enter into contracts, sue and be sued but unlike them it cannot perform the normal human functions. It is, hence, called an artificial person.
  2. Separate Legal Entity: From the day of its inception, a company procures an identity, different from its members. Its assets and liabilities are separate from that of its owners. The law fails to recognize the business and owners to be one and the same.
  3. Formation: The creation of a company is a time consuming, expensive and a complicated process. It involves a ground work of several documentation and compliance with many legal requirements before it can start functioning. Registration of a company is mandatory as provided under the Indian Companies Act, 1956.
  4. Perpetual Succession: A company being a conception of the law, can be brought to an end only by law. It will not exist when a specific procedure for its closure, called winding up, is accomplished.
  5. Control: The entire administration and managing the activities of the company are undertaken by the Board of Directors, which appoints the top management officials for running the business. The directors hold a position of immense importance as they are accountable to the shareholders for the functioning of the company. The shareholders, however, do not have the right to be involved in the day-to-day running of the business.
  6. Liability: The liability of the members is limited to the extent of the capital investment made by them in a company. They can use only the assets of the company to settle their claims as it is the company and not the members that owes the debt. The members can be requested to contribute to the loss only to the extent of the unpaid amount of share held by them. Beyond this, he is not liable to pay anything towards the debts or losses of the company.
  7. Common Seal: As the company is an artificial person acts through its Board of Directors. The Board of Directors enter into an agreement with the others by signifying the company's approval through a common seal. The common seal serves as an engraved equivalent of an official signature. Any agreement which does not have the company seal, is not legally binding on the company.
  8. Risk Bearing: Unlike the sole proprietorship or partnership businesses, the risk of losses in a company is borne by the share holders.


The company form of organization has lot of advantages, some of which are discussed below:
  1. Transfer of Interest: Transfer of ownership is very simple that adds to the advantage of investing in a company. The shares of a public limited company can be disposed and converted into cash when the need arises.
  2. Limited Liability: The shareholder's money will be repaid to them to the amount that is due by selling the assets of the company. The risk borne by the investors is low because, he does not have to part with his personal assets in a partnership firm.
  3. Perpetual Existence: Survival of a company is not affected by death, retirement, resignation, insolvency or insanity of its members due to its separate entity from its members. A company will not die even if all the members quit the organization. It can be liquidated only as per the provisions of the Companies Act.
  4. Scope for Expansion: When compared to the sole proprietorship and partnership forms of organisation, a company has large financial resources. Further, capital investment can be attracted from the public and through loans from banks and financial institutions. Thus there is greater scope for expansion. The investors are prone to invest in shares due to the limited liability, transferable ownership and prospects of high returns in a company.
  5. Professional Management: A company will afford to pay higher salaries to specialists and professionals. Hence it can employ people who are experts in their area of specialisation. There will be division of work and each department would be entitled to carry out one particular activity headed by a specialist thereby enabling efficient administration and wise decision making in the company's operations.


The most important limitations of a company form of organisation are as follows:
  1. Complexity in Formation: To form an effective company, it is essential to allot time, effort and knowledge of legal procedures
  2. Lack of Secrecy: The Companies Act requires every public company to provide lot of information to the Office of the Registrar of Companies. This information is made available to the general public as well. It is, therefore, hard to maintain confidentiality about the operations of company.
  3. Impersonal Work Environment: Disjoining of ownership and management would lead to situations wherein there is absence of effort as well as personal involvement on the part of the officers of a company. With the large size of the company it is further difficult for the owners and top management to maintain personal contact with the employees, customers and creditors.
  4. Numerous Regulations: The performance of a company is subject to many legal provisions and compulsions. A company is loaded with numerous restrictions in respect of aspects such as audit, voting, filing of reports, documentation, and is required to obtain several certificates from different agencies, viz., registrar, SEBI, etc. This brings down the level of freedom of operations of a company and consumes lot of time, effort and money.
  5. Delay in Decision Making: Companies are managed by the Board of Directors which is subsequently followed by the top management, middle management and lower level management. Communications and approvals for various proposals may cause delays not only in taking decisions but also in executing them.
  6. Oligarchic Management: In a company bound by the Companies Act, the Board of Directors are representatives of the shareholders who are the direct owners of the organisation. However, in most of the organizations, there are more shareholders that leads to a situation where the owners have minimal influence in terms of controlling or running the business.


Public Company

Private Company

No. of members

Minimum of 7 and a maximum of 50

Minimum of 2 and a maximum of 50

Minimum no.of directors



Minimum paid up capital

Rs. 5 lakhs

Rs. 1 lakh

Index of numbers


Not mandatory

Transfer of shares

No restriction

Restriction on transfer

Invitation to public to subscribe to buy its shares

Public can be invited to subscribe to its shares or debentures

Public cannot be invited to subscribe to its shares and debentures

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