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Question
Long answer type question.
Define Joint Stock Company. Explain its merits and demerits.
Solution
A joint stock company refers to an organisation formed by a group of persons to perform business activities together. It is considered the most superior form of business organization.
Merits of a joint stock company:
i. Limited liability: In a joint stock company, the liability of the shareholders is limited to the amount paid by them for the purchase of the shares. This implies that in case of unpaid debts, personal property of the shareholders cannot be used for the payment of outstanding business liabilities. Only the company’s assets and funds can be used for the payment of debts.
ii. Perpetual existence: A company, being a separate legal entity, cannot come to an end by itself. It continues to operate even after the death of all its members. This is because the death, retirement or insolvency of any of the members of the organisation cannot cease its existence. Thus, a company enjoys perpetual existence.
iii. Scope for expansion: A company can easily grow and expand its capital. This is because the capital of a company comprises the amount received on its shares. As a result, the company enjoys a large financial resource base. Therefore, in case of expansion, a company can raise additional funds by issuing new shares.
Limitations of a joint stock company:
i. Complexity information: The formation of a company involves a large number of procedures and formalities. The legal procedures involved in the formation are not only lengthy but also expensive.
ii. Impersonal work environment: The management and ownership in a company are separate. Also, the compensation of the management is not directly affected by the profits of the company. This results in lack of efficiency on part of the managers. Moreover, because of the large size of the company, it becomes difficult for the owners to keep track of all operations of the
business.
iii. High degree of regulations: A company is required to follow legal formalities like auditing of the accounts, filing of the reports and documents and voting. These legal provisions make it difficult for the company to operate freely.
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