BACKGROUND AND INTRODUCTION – Joint Stock Company
The limitations of sole-proprietorship and partnership forms of ownership gave birth to joint stock company form of organization. Two important limitations of earlier forms of organisation were adequacy of funds and unlimited liability. The capacity of sole-trader to provide funds for the business is limited. Even in partnership where two or more persons join and combine their funds, the limitation of funds is felt. The demand of business for funds increased with the expansion and development of trade and industry.
The earlier forms of organisation could not meet the ever increasing demand for funds of business. The other limitation which hampered the growth of business was the unlimited liability of owners. The liability of proprietors was not limited to only the amounts invested in business. Their private properties could also be used to meet business liabilities.
The factor of unlimited liability discouraged people to invest more even if they had the capacity to do so. The joint stock company form of organization provides an answer to the difficulties faced by earlier forms. The liability of members is limited and the participation of large number of personal helps in raising more and more funds under joint stock company form of organization.
The present trend of industrial enterprises is to increase their size through expansion and diversification. This tendency is ascribed to two reasons, namely, technological improvement and economic factors. Since Industrial Revolution in England there has been a constant improvement in technology. Machinery has progressively been replacing human labor.
There has always been an endeavor to improve the manufacturing processes by using the latest technological devices. The expansion of banking, insurance and transport services have helped the expansion of trade and industry. Large scale production is also associated with a number of economies in buying, selling and production.
The result of expansion, whether due to technical factors or economic factors has been the demand for enormous capital. The manufacturing industries require large-scale investment for building plant and machinery whereas trading concerns need fixed capital for fixtures, fittings and business premises. In addition to fixed capital, working capital requirements are equally sizeable. Enormous capital requirements of business concerns cannot be met by a few persons. So the need for Joint Stock Company form of organization was felt.
Joint Stock Company organization was started first in Italy in thirteenth century. During seventeenth and eighteenth centuries, Joint Stock Companies were formed in England under the Royal Charter or Acts of Parliament. The speculative business of companies led to the passage of Bubbles Act of 1720 whereby promotion of companies was declared illegal by England’s Parliament. Company form of organisation got a great set-back from this Act. It was only in 1844 that the Joint Stock Companies Act was passed in England because of speculation in business of companies. The Joint Stock Companies Act was passed in 1844 and limited liability was granted only in 1855.
In India the first Companies Act was passed in 1850 and the principle of limited liability was introduced only in 1857. The application of this Act was extended to Banking and Insurance Companies in 1860. A comprehensive bill was passed in 1956. The firms incorporated under this Act are known as “Companies”. The Parliament and State Legislatures can also pass legislations for the incorporation of companies, generally called ‘Corporations”.
Definitions of Joint Stock Company Business
A company is “an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss (as the case may be) arising thereform.”                                     –James Stephenson
According to Prof. L.H. Haney, “A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.”
“A corporation is an artificial being, invisible, intangible and existing only in contemplation of the law. Being a mere creation of law, it possesses only the properties which the charter of its creation confers upon it either expressly or as incidental to its very existence.”     – Chief Justice Marshall
Justice Lord Lindley has given an exhaustive definition of the company. According to him,
“By a company is meant an association of many persons who contributed money or money’s worth to a common stock and employ it for some common purpose. The common stock so contributed is denoted in terms of money and is called the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.”
Indian Companies Act does not define company as such. According to Section 3 of Indian Companies Act 1956, “A company means a company formed and registered under this Act.” According to clause (if) of Section 3, “Existing Company means a company formed and registered under any of the previous company laws.”
From these definitions it is clear that a company is an association of persons who contribute money in the shape of shares and the company gets a legal entity and enjoys a permanent existence.
