Note on Characteristics and Merits & Demerits of Joint Stock Company

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Characteristics of Joint Stock Company

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  • An artificial person: A joint stock company is an artificial person which is created by the law. It has no physical shape as a natural person but has almost all the rights of a natural person. It can sue other and can be sued.

  • Perpetual existence: A joint stock company is established by the law and the law brings it to an end. So, many shareholders may transfer their share and the new person may come in their place but is does not affect the existence of the company.

  • Limited liability: The liability of the shareholder is limited to the extent of the value of shares held or the amount guaranteed by them. If the company is unable to pay to the creditors then the shareholder won't pay anything more than what is to be paid to the company.

  • Common seal: A joint stock company is an artificial person. So, it cannot sign any contract in its name. Therefore, all the documents and contract papers require the affixing of the seal. Any documents with the common seal are only taken into consideration.

  • Democratic management: A joint stock company is a democratic organization. The important decisions are taken by following the principles of democracy in the annual general meeting and the board of director meeting.

  • Transferability of shares: The shares of the joint stock company can be transferable from one person to another without prior permission of the company management. They are free to transfer their shares.

  • Capital is divided into shares: A joint stock company divides its capital into a large number of parts with each value where each part of capital is called share. These shares are purchased by the general public as well as the promoters to be the shareholders of the company.

  • Publication of financial statements: A joint stock company should publish the audited financial statements yearly in a renowned national newspaper. These statement helps to provide information to general public and other stakeholders.

  • Separate legal entity: A joint stock company is an artificial company so it has its own separate legal entity from its members. It can own assets, property, enter into contracts, sue or can be sued by anyone in the court by the law. Its shareholders cannot be held liable for any conduct of the company.

Merits of Joint Stock Company

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  1. Huge capital: Joint stock company has an association of various persons. It has merits of huge capital because different member invests a large amount of capital. When there is a lack of capital in a joint stock company it can issue the shares to the public. Hence, huge capital can be collected when shares are issued.

  2. Perpetual existence: A Joint stock company has separate legal existence. The life of a joint stock company is not affected by death, lunacy, and insolvency of the members. Therefore, a joint stock company has a long term life. Even if there is any changes in management, the board of directors or some member may come or go, the function of the company is not affected.

  3. Limited Liability: Limited liability is the significance of joint stock company. The shareholders should not pay the excess debt of the company by selling their private/personal property. Shareholders are liable up to the invested amount. Due to the provision of limited liability potential investors are attracted towards a joint stock company.

  4. Transfer of shares: Joint stock company has the provision of free transfer of shares. No one is compelled to join and leave the company. Permission or mutual consent is not needed to transfer the shares of a joint stock company.

  5. Democratic management: Joint stock company has democratic management. It is managed by the majority of shareholders who elect the board of directors. They are responsible for managing the activities of a joint stock company. Competent members are elected from election to manage the company. Thus, democratic management can be seen in a joint stock company.

  6. Public faith: People have faith in a joint stock company. It has an obligation to disclose the financial documents to annual General Meeting. The banks and the financial institutions believe in a joint stock company because of the accounts disclosed.

  7. Large scale operation: Joint stock company has an association of different managerial skill because different members are associated with it. Due to the sufficient capital and competency of the members (directors)joint-stock company has the possibility of large scale operation. Hence, a joint stock company has large-scale operation.

  8. Social importance: Joint stock company is also a social creature. So, it invests amount for the betterment of society. It invests its capital in various sectors such as health, education, sports and so on. Hence, a joint stock company has a responsibility to society.

Demerits of Joint Stock Company

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  1. Difficult legal formalities: Joint stock company has demerits of difficult legal formalities. It is difficult to establish and run. It has to follow difficult legal formalities in comparison to sole trading and partnership firm. It is rigidly observed by rules, regulations or laws of government because it collects capital from the general public.

  2. Lack of secrecy: A Joint stock company has an obligation to disclose the accounts to insider as well as an outsider. The planned policies and strategies of the joint stock company are transparent because they are discussed in Annual General Meeting. The company has to publish its statements of financial affairs every year. So, it has demerits of lack of secrecy.

  3. Delay in decision making: Sometimes business organization has to take the quick decision but the quick decision is not possible in a joint stock company. The major decision of the company must be passed from Annual General Meeting. So, long time is required to pass the decision. Thus, business delays grabbing the opportunities of an external environment.

  4. Speculation of share: There is the possibility of speculation of share in a joint stock company. Some shareholders have inside approach with directors. Those shareholders can take undue advantage when they misuse the inside approach with directors.

  5. Management of oligarchy: Management oligarchy means the rule of the minority. The shareholders elect few directors in annual general meeting. Those few directors rule/control over the activities of a large number of shareholders. This is known as oligarchy.

  6. Conflict of interest: Different parties are involved in a joint stock company. They are shareholders, creditors/bankers, and employees. Different parties have different interest. If the interest of one party is addressed, it negatively impacts the interest of others. Therefore, a joint stock company has demerits of conflict of interest.

  7. Neglect the minority: Joint stock company gives priority to majority shareholders. Minority shareholders are neglected in Annual General Meeting and election. Only majority shareholders are given priority to take the decision of the joint stock company. Minority shareholders are boycotted to run productive business activities.

  8. Groupism: Unhealthy groupism can be seen in the joint stock company in the period of election. Constructive groupism is fruitful but destructive groupism is harmful to the company. Unhealthy groupism leads to the failure of the company. So, a joint stock company should be able to minimize unhealthy groupism.

References:

Khanal, Soma Raj, Surendra Thapa Aslami and Sitaram Dhakal.Business Studies.Kathmandu: Taleju Prakashan, 2067.

Pant, Prem R., et al.Business Studies.Kathmandu: Buddha Academic Publishers and Distributors Pvt. Ltd., 2010.

  1. A joint stock company is an artificial person which is created by the law.
  2. A joint stock company is established by the law and the law brings it to an end.
  3. A Joint stock company has separate legal existence. 
  4. A joint stock company has the provision of free transfer of shares.
  5. A Joint stock company has an obligation to disclose the accounts to insider as well as an outsider.  
.

Very Short Questions

The characteristics of joint stock company are:

An artificial person:
A joint stock company is an artificial person which is created by the law. It has no physical shape as a natural person but has almost all the rights of a natural person. It can enter into contact, sell, hold and buy the properties. 

Perpetual existence:
 A joint stock company is established by the law and the law brings it to an end. It is a corporate body.  So, many shareholders may transfer their share and the new person may come place in their place but is does not affect the existence of the company.

Limited liability:
The limited liability is another important feature of the company.  The liability of the shareholder is limited to the extent of the value of shares held or the amount guaranteed by them. If the company is unable to pay the creditors then the shareholder won't pay anything more than what is to be paid to the company.

Common seal:
A joint stock company is an artificial person. So, it cannot sign any contract in its name.  Any document bearing the common  seal of the company, a signed by two directors, legally binds the company.

Democratic management:
A joint stock company is a democratic organisation. The important decisions are taken by following the principles of democracy in the annual general meeting and the board director meeting.

Transferability of shares:
 The shares of the joint stock company can be transferable from one person to another without prior permission of the company management. This transfer of shares changes the ownership but does not affect the regular functioning of the company.

Capital is divided into shares:
A joint stock company divides its capital into a large number of parts with each value where each part of capital is called share. These shares are purchased by the general public as well as the promoters to be the shareholders of the company.

Publication of financial statements:
Financial statement of the companies have to be  published on a regular basis for public information. A joint stock company should publish the audited financial statements yearly in a renowned national newspaper. These statement helps to provide information to general public and other stakeholders.

Separate legal entity:
A joint stock company is an artificial company so it has its own separate legal entity from its members. It can own assets, property, enter into contacts, sue or can be sued by anyone in the court by the law. Its shareholders cannot be held liable for any conduct of the company.

The advantages of joint stock company are:

Huge capital:
A company has the ability to collect huge financial resources. It  has merits of huge capital because different member invests huge capital. When there is a lack of capital in a joint stock company. Business activities that  require more capital are best organized in the form of a country.

Limited liability:
Limited liability is the significance of joint stock company. The shareholders should not pay the excess debt of the company by selling their private/personal property.  This facility attracts the general people for investment in the company.

Perpetual existence:
It is another important advantage of the joint stock company. The life of a joint stock company is not affected by death, lunacy, and insolvency of the members. Therefore, a joint stock company has a long term life, which is beneficial, both to the company and its shareholders.

Transferability of shares:
Shareholders have the right to sell the shares of a joint stock company to those who are interested to buy.  No one is compelled to join and leave the company. Transferability of shares  encourages the people to purchase and sales shares through stock exchanges.

Democratic system:
Joint stock company has democratic management. It is managed by the majority of shareholders who elect the board of directors. They are responsible for managing the activities of a joint stock company. 

Public faith:
People have faith in a joint stock company. It has an obligation to disclose the financial documents to annual General Meeting. The banks and the financial institutions believe in a joint stock company because of the accounts disclosed.

Large scale operation:
Joint stock company has an association of different managerial skill because different members are associated with it. Due to the sufficient capital and competency of the members (directors)Joint-stock company has the possibility of large scale operation. Hence, a joint stock company has a large-scale operation.

Social importance:
Joint stock company is also a social creature. So, it invests amount for the betterment of society. It invests its capital in various sectors such as health, education, sports and so on. Hence, a joint stock company has a responsibility to society.

 

The  disadvantages of joint stock company are:

Difficult legal formalities:
Joint stock company has demerits of difficult legal formalities. It is difficult to establish and run. It has to follow difficult legal formalities in comparison to sole trading and partnership firm. The legal formality also cost some amount of money.

Lack of secrecy:
A company must provide each shareholder with an annual report. The planned policies and strategies of the joint stock company are transparent because they are discussed in Annual General Meeting. The company has to publish its statements of financial affairs every year. So, it has demerits of lack of secrecy.

Delay in decision making:
Sometimes business organization has to take the quick decision but the quick decision is not possible in a joint stock company. The major decision of the company must be passed from Annual General Meeting. so, long time is required to pass the decision. Thus, business delays grabbing the opportunities of an external environment.

Speculation of share:
There is the possibility of speculation of share in a joint stock company. Some shareholders have inside approach with directors. Those shareholders can take undue advantage when they misuse the inside approach with directors.

Management of oligarchy:
 Management oligarchy means the rule of the minority. The shareholders elect few directors in annual general meeting. Those few directors rule/control over the activities of a large number of shareholders. This is known as of oligarchy.

Lack of interest:
There are main shareholders, creditors/bankers, and employees. Different parties have different interest. If the interest of one party is addressed, it negatively impacts the interest of others. Therefore, a joint stock company has demerits of conflict of interest.

Groupism: Unhealthy groupism can is seen in the joint stock company in the period of election. Constructivegroupismis fruitful but destructive groupism is harmful to the company. Unhealthygroupismleads to the failure of the company. So, a joint stock company should be able to minimize unhealthy groupism.

 

The merits of joint stock company are:
Huge capital
Perpetual existence
Limited liability
transferability of shares
Democratic system
Public faith
Large scale operation
Social importance

The demerits of joint stock company are:
Difficult  legal formalities
Lack of secrecy
Delay in decision-making
Speculation of share
Management of oligarchy
Conflict of interest
Neglect of minority
Groupism

0%
  • _______are demerits of joint Stock Company.

    Difficulty in formation
    All
    Lack of secrecy
    Lack of prompt decision
  • __________is the example of charactered company.

    The Bank of England
    Pulp limited
    Nepal Stock Exchange Limited
    Bhrikuti paper
  • According to Nepal Company Act__,a public limited means any company incorporated according to this act.

    2047
    2028
    2063
    2034
  • In public company,there is atleast ___members and the membership of which is open to a general public.

    34
    7
    12
    19
  • ______are the examples of Public Company.

    Nepal Bank limited
    Pashupati soap pvt.Ltd
    All
    kantipur publication pvt.Ltd
  • ________is a major document of a joint stock company.

    Prospectus
    Memorandum of Association
    Articles of Association
    None
  • _________are the demerits of joint stock company.

    Lack of secrecy
    Conflict of Interest
    All
    Excessive regulation
  • Which one is not a demerits of joint stock company ?

    Difficulty in formation
    Limited capital
    Lack of secrecy
    Excessive regulation
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