CBSE Class 10 Elements of Business Unit I: Joint Stock Company

Unit I: Joint Stock Company

(a) Joint Stock Company
(b) Private and Public company – meaning and features

(a) Joint Stock Company:

A joint stock company is an association of persons formed for carrying out business activities under the Companies Act 2023. Joint Stock Companies have legal status independent of its members. In other word, a company can be described as an artificial person having a separate legal entity, perpetual succession and common seal.
The shareholders are the owners of the company while the Board of Directors is the chief managing body elected by the shareholders. Usually, the owners or shareholders exercise an indirect control over the business. The capital of the company is divided into small parts known as shares and the investors are known as shareholders. These shares can be transferred freely from one shareholder to another except in a private limited company. The profit of the company is distributed among the shareholders in the form of dividend.

Features of Joint Stock Companies:

1. Artificial entity: A company is a creation of law and exists independent of its members and shareholders. Like natural persons, a company can own property, incur debts, borrow money, enter into contracts, sue and be sued but does not have biological life. It is an artificial person.

2. Separate legal entity: From the day of coming into existence or incorporation, a company acquires an identity distinct from its members or shareholders. The assets and liabilities of the company belong exclusively to it. The law does not recognise the business and the owners to be one and the same as is the case with sole proprietorship concerns.

3. Formation: 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 formalities before it can start functioning. The companies are listed either under the provisions of Indian Companies Act, 1956 or Indian Companies Act 2013.

4. Perpetual Succession: A company being a creation of the law, can be brought to an end only by the provisions of the law. It will only cease to exist when specific procedure for its closure, called winding up is completed. Members may come and members may go but the company continues to exist till then.

5. Management control: The management and control of the affairs of the company is undertaken by the board of directors which appoints the top management officials. The directors hold position of huge importance and they are accountable to shareholders for performance of the company since shareholders do not have the right to be involved in the management of the company.

6. Limited liability: The liability of the shareholders is limited to the extent of the value of shares held by them and they do not have any personal liability towards debts incurred by the company. The creditors can only use the assets of the company to settle their claims.

7. Common seal: A company being an artificial entity cannot sign on behalf the company. Therefore, every company is required to have its own seal which acts as the official signature of the company. Documents without the common seal are not binding on the company.

8. Risk bearing: The risk of bearing losses is borne by all the shareholders of the company to the extent of their shares in the company. The risk of loss is thus spread over a large number of shareholders unlike proprietorship or partnership firms.

(b) Private and Public company – meaning and features

A company can either be a private limited or public limited company. It is necessary for a private company to use the words ‘private limited’ after its name while a public limited company uses the word ‘limited’ at the end of its name. The features of the private limited and public limited companies can be enumerated as follows:

Basis	Public company	Private company
Members	Minimum – 7 Maximum – unlimited	Minimum – 2 Maximum – 200
Minimum number of directors	Three	Two
Index of members	Compulsory	Not compulsory
Transfer of shares	No restriction	Restriction on transfer
Invitation to public to subscribe to shares	Can invite the public to subscribe to its shares or debentures	Cannot invite the public to subscribe to its shares. There is no need to issue prospectus.

Merits of Company Form of Organisation:

The company form of organisation offer many advantages as listed below:

(i) Limited liability: The shareholders are liable to the extent of the amount of the shares held by them. The value of shares already paid by them represents assets of the company and only assets of the company can be used to settle debts leaving the owner’s (shareholders) personal property free from any charge. This reduces the degree of risk borne by an investor.

(ii) Transfer of interest: The ease of transfer of ownership is another advantage of investing in a company. The shares of a public limited company can be sold in the market and easily converted into cash.

(iii) Perpetual existence: A company has a separate entity from its members. So, it will continue to exist even in the case of death of members or retirement, resignation or insolvency of any one of them.

(iv) Scope for expansion: A company has access to much bigger financial resources compared to proprietorship or partnership firms. The investors willingly invest in a company because their liabilities are limited and there is greater scope for future expansion.

(v) Professional management: Limited companies can afford to engage professional managers and use their expertise in respective areas of specialisation. This leads to balanced decision making as well as greater efficiency in the company’s operations.

Limitations of Companies:

(i) Complexity in formation: The formation of a company requires complex legal procedure and involves much more time and effort than other forms of business organisations. So, the pre-operative expenses are higher.

(ii) Numerous regulations: Being governed under the Companies Act, functioning of a company is subject to many legal obligations and compulsions. Audit is compulsory and clearance from various agencies like Registrar of companies, SEBI are required. Sometimes, due to these factors, decision making is delayed.

(iii) Conflict of interest: In a company, conflict of interest among various stakeholders is not unusual. There are employees wanting higher salaries, consumers looking for still better quality or the shareholders wanting higher dividends. It is always so difficult to satisfy everyone.

(iv) Oligarchic hierarchy: In a company, the Board of Directors is the all -powerful body when it comes to decision making which may not always fulfil the interest of ordinary shareholders. Dissatisfied shareholders have very little option but to sell their holdings and exit the company. The power-centre of directors can easily lead to rule by the few.

CBSE Class 10 Elements of Business Unit I: Joint Stock Company – Completed

The following topics have been completed in Unit I: Joint Stock Company:

(a) Joint Stock Company
(b) Private and Public company – meaning and features