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EUROPA SCIENCE & COMMERCE ACADEMY

Q. No. 9: What is a joint stock company? disadvantages of a joint stock company? ANSWER: Explain the advantages and

INTRODUCTION: Joint Stock Company is the third major legal form of business owner ship. It has entirely a different organizational structure form the sole proprietorship or partnership. The law relating to joint stock co in Pakistan has been laid in the Companies ordinance 1984 which came into force on January 1, 1985. It is a Federal law. It has 514 sections and 8 schedules. DEFINITIONS: According to L. H Haney A Company is an artificial person created by law having separate entity with a perpetual succession and common seat. Justice Lindley is of the view point that: A Company is an association of many person who contribute money and moneys worth to a common stock and employ it for some common purpose.

Advantages of Joint Stock Company:

A joint stock company has the following merits: Limited Liability: In a joint stock company, all the shareholders have a limited liability. In case of loss to the company, the liability of the shareholders is limited to the amounts; they have invested in the company. Large Capital or More Capital: Unlike individual proprietorship or partnership, a joint stock company can arrange capital in large quantity. It can obtain capital easily and even at a lower rate of interest by floating its shares in the market. Benefits of large scale production: The company due to the increase in the size of business enjoys all the economies of large scale production. Perpetual life: The company has long life or is of more permanent nature. It does not make any difference to the company if the death of shareholder occurs or he sells his shares to another person. Shareholders may change, but the company functions normally. Easy Separation: Unlike individual proprietorship or partnership, its shareholders can separate from the company by selling their shares to others. Spread of risk: In company form of organization, the risk is distributed among large number of shareholders. From the point of view of an investor, it is a great advantage. Democratic Organization: The management of the company is carried on by the elected board of directors on behalf of and for the shareholders of the company. Thus the organization of the company is democratic. Services of Specialized Persons: Persons who dont have capital but are rich in managerial or business ability are appointed as managers, etc. Thus a company can take advantage of the services of table and efficient persons. Full Legal Cover:

Prepared By: H.ABDUL REHMAN

0321-6485593

EUROPA SCIENCE & COMMERCE ACADEMY


There is full legal cover on the activities of a company from the birth to its liquidation. People have, therefore, greater confidence in companies than in sole proprietorship or partnership. Higher rate of Profits: Due to use of large capital and technical skills the companys cost of production reduce and on the other hand rate of profit increases. Recognized legal entity: The joint stock company is incorporated under the Companies Ordinance. In all legal matters, therefore, it is dealt with as an individual person. The company can enter into contract borrow money, open banking account in its name. It can sue or be sued, hold, deal and dispose property in its own name. Audit: The auditors audit the balance sheets of the company. The joint stock company is protected against the fraudulent of the directors, if any. Transfer of Shares: In Joint Stock Company the shares of public ltd. Company can easily be transferred/disposed off. Easy Expansion of Business By selling the shares, bonds and debentures a joint stock company collects a large amount of capital which helps to expand the business. Employment Opportunity: Wide operation of Joint Stock Company also plays very important role in providing employment opportunities within country. End of Corruption: The government audits the various statements of the joint stock company from time to time so the managing authorities of the company get less chances of corruption. Bold Management: This type of organization can undertake big risks which sole proprietorship or partnership form of organizations cannot do. As we know that more risk more profit. Research and Experiments: The joint stock company has enough capital to expand its business as well as for research experiment. Research and experiments lead to inventions. It greatly improves and revolutionize the technique of production. Social Benefits: Joint stock companies have made it possible for the persons of low-income groups to invest in productive activity under unified management. The number of the poor is thus moving up levels of middle income groups.

DISADVANTAGES OF JOINT STOCK COMPANY


A joint stock company has following demerits: Complicated process of formation: The formation of a joint stock company is much more complicated than sole proprietorship or partnership. There are many legal formalities which are to be observed that consume a lot of time, energy & money also. Burdon of Regulations: There is burden of regulations, frequent reports for its internal working also. Danger of Monopoly: The joint stock company can create monopoly in the market. Sometimes a few companies producing similar goods form a union and create monopoly. They exploit the consumers by charging higher prices because of their monopoly. Lack of Secrecy: A joint stock company cannot maintain its secrecy due to this reason that companies have to submit various reports to register. Sometimes due to lack of secrecy goodwill of the company is affected. Stock Exchange speculation: Prepared By: H.ABDUL REHMAN 0321-6485593

EUROPA SCIENCE & COMMERCE ACADEMY


The joint stock company facilitates speculation in shares at stock exchange. This speculation is harmful to the interest of the shareholders and for sound investment. Centralization of powers: In joint stock company all the powers are in few hands and due to this an ordinary shareholder cannot take interest in the affairs of the company. Impersonal relationship: As the size of business run by company is expanding day by day, feeling of separation between the employers and employees is widening. Separation of ownership from control: In a joint stock company, the shareholders who are real investors are not allowed to take part in the operation of the business. There is thus a separation of ownership from control. Favoritism & Nepotism: There is often a top heavy management in the companys organization. The directors, managers etc. employ their near and dear ones at the key positions of the company who may or may not be fit for the assigned responsibilities. Delayed decision: The organization is usually uncontrollable. It cannot take quick decision. Increase Operational costs: The operational cost of the companies is very high. Huge expenditure makes by the companys director and holding on meeting increase the cost of maintenance. Lack of responsibility: There is a lack of personal interest and responsibility in the business of joint stock companies. If any mistake occur everybody tries to shift or transfer its responsibility to other person and he remain safe. Lack of interest of the shareholders: The shares of the company do not show the true picture of the company to the public and they deceive them. Directors of company usually encourage corruption at higher levels to get countrys policies changed according to their benefit and to get concessions from Government. Corruption: The directors of the company do not show the true picture of the company to the public and they deceive them. Directors of company usually encourage corruption at higher levels to get countrys policies changed according to their benefit and to get concessions from Government. Inequalities: The dividend of the company is distributed among the shareholders. Laborers who are more in number are paid fixed wages. Generally a single person purchases a majority of shares and takes away a large part of the total dividend. It leads to the unequal distribution of wealth and income in the country. Disadvantages of large scale production: In the joint stock company, production is undertaken on a large scale. Thus, internal and external diseconomies, defects of division of labor and demerits of use of machinery etc. are commonly found in the joint stock company.

Prepared By: H.ABDUL REHMAN

0321-6485593

EUROPA SCIENCE & COMMERCE ACADEMY

Prepared By: H.ABDUL REHMAN

0321-6485593