The definition of a joint stock company highlights the following features of a company.
- Artificial person:
A company is a creation of law and exists independent of 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 breathe, eat, run, talk and so on. The company enjoys all the rights as a citizen of a country would enjoy. It is, therefore, called an artificial person.
- Separate legal entity:
From the day of its incorporation, a company acquires an identity, distinct from its members. The owners are different from the people who manage the business. Its assets and liabilities are separate from those of its owners. The management is however headed by owners who are elected directors. The law does not recognize the business and owners to be one and the same. The company cannot be held responsible for any misdeeds of the members.
The formation of a company is a time consuming, expensive and complicated process. The formation of a Joint Stock Company is governed by the rules and regulations laid down in the Companies Act. It involves the preparation of several documents and compliance with several legal requirements before they can start functioning.
- Perpetual succession:
A company is a creation of the law can be brought to an end only by law. The continuity of the business is not affected by the death, insolvency or insanity of any member. It will only cease to exist when a specific procedure for its closure, called winding up, is completed. So the life of a company is in no way related to the life of its members. It’s a proverb – “Men may come and men may go, but a company will go until it is wound up.”
The management and control of the affairs 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 significance as they are directly accountable to the shareholders for the working of the company.
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 since it is the company and not the members that owe the debt. The personal asset of a shareholder cannot be used to pay the company’s liabilities. The members can be asked to contribute to the loss only to the extent of the unpaid amount of share held by them.
- Common seal:
The company is an artificial person who acts through its Board of Directors. The Board of Directors enters into an agreement with others by indicating the company’s approval through a common seal. The company, being an artificial being, cannot affix its signature on the documents on its own. The common seal is the engraved equivalent of an official signature.
- Transferability of shares:
In a joint-stock company, the ownership is divided into transferable units known as shares. The shares of a Joint Stock Company are simply transferable from one person to another, since it is a Public Limited Company. The shares of a Private Limited Company or Government Company are not transferable.
- Risk bearing:
The risk of losses in a company is borne by all the shareholders. This is unlike the case of a sole proprietorship or partnership firm where one or a few persons respectively bear the losses. In the face of financial difficulties, all shareholders in a company have to contribute to the debts to the extent of their shares in the company’s capital.