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Introduction to Business

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Introduction to Business ­MGT 211
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LESSON 9
JOINT STOCK COMPANY
JOINT STOCK COMPANY
Joint Stock Company is the third major form of business organization. It has entirely different
organizational structure from sole proprietorship and partnership. There are two advantages
of Joint Stock Company. First of all, it enjoys the advantage of increased capital. Secondly,
the company offers the protection of limited liability to the investors.
The law relating to Joint Stock Company has been laid in Companies Ordinance, 1984,
which came into force on January 1, 1985 in Pakistan.
DEFINITION
Following are some important definition of Joint Stock Company:
1.
Simple Definition
"A company may be defined as an association of persons for the purpose of making
profit."
2.
According to Kimball,
"A corporation by nature is an artificial person, created or authorized by a legal statue
for some specific purpose."
3.
According o S.E. Thomas,
" A company is an incorporated association of persons formed usually for the pursuit of
some commercial purpose."
Structural Diagram
Joint Stock Company
Specific Purpose
Association of
Persons
Legal Statute
FEATURES OF JOINT STOCK COMPANY
Following are the main features of a Joint Stock Company.
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1. Creation of Law
A joint stock company is the creation of law or special `Act' of the state. It is formed and
governed by the Companies Ordinance or by a special Act of the legislature.  Pakistani
companies are incorporated under the Companies Ordinance, 1984.
2. Capital Borrowing
The company can borrow capital in its own name to expand the business.
3. Separate Legal Entity
A Joint Stock Company has separate legal entity, apart from its members. It can sue in a
court of law in its own name.
4. Legal Person
A Joint Stock Company, as a legal person, has the usual rights of any person to carry on the
business in its own name, to own property, to borrow or lend money and to enter into contract.
5. Long Life
A joint stock company has long life as compared to other forms of business organizations.
6. Limited Liability
The liability of the shareholder is limited to the extent of the face value of the shar4es they
hold.
7. Large Scale Business
Because of more members, a company has larger capital as compared to sole trade ship and
partnership, which helps in doing business on large scale.
8. Management of Company
The shareholders elect the Board of Directors in the Annual General Meeting and all the
management is selected by the Board of Directors.
9. Number of members
In case of private limited company, minimum number of shareholders is `2' and maximum is
`50'; but in case of public limited company, minimum number is `7' and there is no limit for
maximum number.
10. Transferability of Shares
A shareholder of a company can easily transfer his shares to other persons. There is no
restriction on the purchase and sale of shares.
11. Trade Agreement
A joint stock company enjoys separate existence, so it can join the trade agreements with
other firms in its own name.
12. Purchases and Sale of Property
A joint stock company can purchase and sale the property in its own name.
13. Payment of Taxes
A joint stock company pays double taxes to the government.
14. Object
The basic object of a joint stock company is to earn profit. Whole profit is not distributed
among the shareholders. Some portion is transferred to General Reserve for emergencies.
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15. Government Control
A joint stock company has to comply with the rules of the government. It has to audit its
accounts.
16. Easy Mode of Investment
The capital of a joint stock company is divided into the shares of small value. So, every
person can purchase these shares according to his income and saving.
17. Common Seal
Since a company is an artificial person created by law, therefore, it cannot sign documents for
itself.  The common seal, with the name of the company is used as a substitute for its
signature.
ADVANTAGES AND DISADVANTAGES OF JOINT STOCK COMPANY
ADVATNAGES OF JOINT STOCK COMPANY
Following are the advantages of Joint Stock Company:
1. Expansion of Business
A joint stock company sells the shares, debentures and bond s on large scale. So, a joint
stock company can collect a large amount of capital and can expand its business.
2. Easy Access to Credit
A joint stock company can get a huge amount of capital from banks and other institutions.
3. Easy to Exit
It is easy to separate oneself from a joint stock company by selling his shares.
4. Experts' Services
Because a joint stock company has a strong financial position, so it may hire the service of
qualified and technical experts.
5. Employment
Joint stock companies are also playing very important role to provide employment to
unemployed persons of the country.
6. Flexibility
There is flexibility in such business organizations.
7. Limited Liability
The liability of the owner is limited. In case of loss, the shareholders are not required to pay
anything more than the face value of the shares.
8. Large Scale Production
Availability of huge amounts of capital makes possible for a joint stock company to produce
goods on very large scale, at a lower cost.
9. Larger Capital
There is no problem of capital in a joint stock company because there is not limit for maximum
number of members. So, a joint stock company collects capital from many people.
10. Long Life
A joint stock company has a permanent life. If one or more than one shareholder die, or sell
their shares, it makes no difference to the company. New shareholders take their place.
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11. Long-term Projects
A joint stock company has a permanent and long life and huge capital. Such organizations
can undertake the projects, which may give profit after many years.
12. Spread of Risk
In joint stock company, the risk of business is spread over a large number of people. Such
organizations can undertake risky projects, which other types or organization do not take.
13. Transfer of Shares
In joint stock company, the shares of public limited company can be easily transferred or
disposed off. There is no restriction on the transfer of shares in a joint stock company.
14. Increase in Saving and Investment
The shares are in large number but their value is small. The shares of a company may have a
value of Rs. 10, Rs. 100 etc. So, rich as well as poor can purchase the shares of a company.
This leads to increase in savings and investment.
15. Better Management
Such organization is administered by the elected directors. These directors are generally
experienced and qualified in business field. This increases the efficiency of the company.
16. Beneficial Advices
A joint stock company can take beneficial advices from the government at the time of need
which reduces the chances of its failure.
17. Public Confidence
A joint stock company is created by law and is supervised by legal authority. So, a joint stock
company can easily win the public confidence.
18. Higher Profits
With the help of larger capital and technical skill, the cost of production is reduced, which
increases the rate of profit.
DISADVANTAGES OF JOINT STOCK COMPANY
Some of the disadvantages of the joint stock company are given below:
1. Initial Difficulties
It is more difficult to establish a joint stock company as compared to other business
organizations.
2. Lack of Interest
Most shareholders become relaxed and leave all the functions to be carried out by the
directors. This usually encourages the directors to promote their own interest at the cost of the
company.
3. Labor Disputes
In such organization there is no close contact of the workers with the owners or the
shareholders.  This leads to formation of labor unions to fight against the company's
management.
4. Lack of Responsibility
There is lack of personal interest and responsibility in the business of a joint stock company. If
any mistake occurs, everybody tries to shift or transfer his responsibilities to other persons and
he remains safe.
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5. Lack of Secrecy
A joint stock company cannot maintain its secrecy due to the reason that a company has to
submit various reports to the registrar.
6. Lack of Freedom
A joint stock company cannot perform its functions freely because it has to submit various
reports to the registrar form time to time.
7. Monopoly
Due to larger size and resources, a joint stock company is in a position to create monopoly.
Sometimes a few customers make agreement and exploit the consumers.
8. Speculation
Due to free transfer of shares and limited liability, speculation in the stock market takes place,
which may affect the economy of the country.
9. Corruption
The directors of the company do not show the picture of the company to the public and
encourage corruption by changing the policies for their personal interest.
10. Complicated Process
The formation of a joint stock company is a complicated process due to many legal formalities.
11. Centralization of Power
In joint stock company, all the powers have in a few hands and due to this, an ordinary
shareholder cannot participate in the affairs of a company.
12. Double Taxes
A joint stock company has to pay double taxes to the government. Firstly, company pays tax
on the whole profit of the company. Secondly, every shareholder pays tax on his individual
income.
13. Exploitation
Ordinary shareholders do not have full information about the affairs of their company. So, they
are exploited.
14. Problem of Large-Scale Production
Since joint stock company produces on large-scale, so many problems arise in the economy.
15. Nepotism
In a joint stock company, the directors of company employ their inefficient and incapable
relatives and friends and give key jobs to them. As a result, the company suffers a loss.
16. Late Decision
In joint stock company, the decision making process in time consuming because a meeting is
necessary to solve the business problems and matters.
Distinguish between Public Limited Company and Private Limited Company.
PUBLIC COMPANY
It is a company which is formed by a least `7' members, and there are no restrictions:
for the transfer of shares.
for maximum numbers, and
for subscription of shares and debentures.
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PRIVATE COMPANY
It is a company which is formed by at least `2' members and has certain restrictions:
for the transfer of shares
for maximum number of members,
for subscription of shares and debentures.
DISTINCTION BETWEEN PUBLIC LIMITED
COMPANY AND PRIVATE LIMITED COMPANY
________________________________________________________________________
Public Limited Company
Private Limited Company
________________________________________________________________________
1. Number of Members
Minimum number of members
There must be at least `2'
should be `7' and there is no
members and maximum
restriction for the maximum
number should not exceed
number of members
`50'.
2. Number of Directors
Minimum number of directors
Its shareholders may elect at
Is `7' and maximum number
least `2' directors and
of directors is appointed
maximum number of directors
according to its Articles of
is appointed according to its
Association.
Articles of Association.
3. Issue of Security
It can invite the public for
It cannot invite the public for
subscription of its shares and
subscription of any type of
debentures.
security.
4. Prospectus
It is compulsory for public
It is not compulsory to file the
company by law of file the
prospectus with registrar's
prospectus with the registrar's
office.
office.
5. Certificate of Incorporation
It cannot start the business
It can commence business
after receiving the certificate
soon after it receives the
of incorporation, unless it
certificate of incorporation.
receive the certificate of
commencement.
6. Certificate of Commencement
It is necessary for public
It is not compulsory by law to
limited company to obtain the
obtain the certificate of
certificate of commencement
commencement of business
of business.
7. Title
Every public company has to
Every private company has to
use the word "limited after its
use the word "Private limited"
name.
after its name.
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Introduction to Business ­MGT 211
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8. Publication
Public company must publish
There is no restriction for
its annual performance report.
publication of annual report.
9. Shares Transferability
It shares can be transferred to
Its shares cannot be
others without restriction.
transferred and disposed off to
others without any restriction.
10. Statutory Meeting
It has to hold a statutory
It is not required by law to
meeting within prescribed
hold statutory meeting
limited.
11. Submission of Report
It is required by law to submit
It is not required by law to
various types of reports to the
fulfill the conditions of
registrar's office, i.e.
minimum subscription before
Auditors' Report, Profit and
its incorporation.
Loss Account, Balance Sheet.
12. Minimum Subscription
It cannot obtain the certificate
It is not required by law to
of commencement of business
fulfill the conditions of
without fulfilling the condi-
minimum subscription before
tion of minimum subscription.
its incorporation.
13. Written Consent of Directors
In public company directors
he directors of private
have to give written consent
company are not required to
that they are ready to act as
give their consent for directorship.
the directors of the company.
14. Tax Payment
Public company has to pay
Private company only pays tax
double tax to the government.
on its whole profit.
15. Dissolution
Public company is dissolved
A separate legal procedure is
according to Companies
adopted for the dissolution of
Ordinance, 1984.
private company.
________________________________________________________________________
PROCEDURE OF FORMATION OF A JOINT STOCK COMPANY IN PAKISTAN.
Joint Stock Company is the third major form of business organization. It has entirely different
organizational structure from sole proprietorship and partnership. There are two advantages
of Joint Stock Company. First of all, it enjoys the advantage of increased capital. Secondary,
the company offers the protection of limited liability to the investors.
The law relating to Joint Stock Company has been laid in Companies Ordinance, 1984,
which came into force on January 1, 1985 in Pakistan.
Following are the important stages or steps for the formation of a joint stock company:
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Introduction to Business ­MGT 211
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Formation of joint Stock Company
Promotion
Incorpo-
Capital
Certificate
Stage
ration
Subscription
of Com-
Stage
Stage
mencement
PROMOTION STAGE
The promoters do the basic work for the start of a commercial or an industrial business on
corporate basis.
Promotion is the discovery of ideas and organization of funds, property and skill, to run the
business for the purpose of earning income. Following steps are involved in the stage of
promotion.
1. Idea about Business
Before starting the business, promoters have to think about the nature and production of
company's business.
2. Investigation
After deciding the nature of business, promoters go in preliminary investigation and make out
plans as regard to the availability of capital, means of transportation, labour, electricity, gas,
water etc.
3. Assembling various Factors
After making initial investigation, the promoter starts accumulating various factors in order to
assemble them. They arrange license, copyrights, employment of necessary employees etc.
4. Financial Sources
The promoters also decide the capital sources of the company and they work out the ways
through which capital can be generated.
5. Preparation of Essential Documents
In addition to above discussed matters, the promoters also prepare following essential
documents for the formation of company:
Memorandum of company
Articles of company
Prospectus of company
The promoters carrying out these various activities give the company its physical form in the
shape of:
Giving a name to the company
Sanctioning of Capital Issue
INCORPORATION STAGE
The second stage for establishment of a company is to get it incorporated.
1.Filling of Document
Following documents are to be submitted by the promoters in the Registrar's office.
(a) Memorandum of Association
A document indicating name, address, objects, authorized capital etc. of a company.
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(b) Articles of Association
A document containing laws and rules for internal control and management of a company
(c) List of Directors
A list of the names, occupations, addresses, along with the declaration of directors.
(d) Written Consent of Directors
A written consent showing their willingness to act at directors, to be sent to the Registrar.
(e) Declaration of Qualifying Shares
A declaration certificate showing that the directors have taken up qualifying shares and have
paid up the money or pay it in near future to the registrar.
(f) Prospectus
Promoters have to file a prospectus with the registrar.
(g) Statutory Declaration
A statutory declaration is to be sent to the Registrar that all legal formalities have been
completed.
2. Payment of Registration Fee
For the registration of company, the registration fee is also paid to the Registrar. For example.
Application and documents filing fee
Registration fee
Stamp fee on Memorandum and Articles
3. Certificate of Incorporation
If the registrar finds all the documents right and thinks that all formalities have been fulfilled
then he issues the certificate of incorporation to promoters.
CAPITAL SUBSCRIPTION STAGE
After getting certificate of incorporation, the next stage is to make arrangement for raising
capital. For any kind of business, the company raises its capital through following sources:
By Issuing Shares
By Issuing Debentures
By Savings
CERTIFICATE OF COMMENCEMENT
For the commencement of business, every public company has to obtain the certificate of
commencement, which requires the fulfillment of following conditions:
1. Issue of Prospectus
A company has to issue prospectus for selling shares and debentures to public.
2. Allotment of Shares
The shares and debentures are allotted according to the pro visions of memorandum, when
applications are received from the public.
3. Minimum Subscription
It is also certified that the shares have been allotted up to an amount, not less than the
minimum subscription.  After verifying the foregoing documents, the registrar issues a
certificate of commencement of business to public company.
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Table of Contents:
  1. INTRODUCTION:CONCEPT OF BUSINESS, KINDS OF INDSTRY, TYPES OF TRADE
  2. ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTS:THE ECONOMIC ENVIRONMENT
  3. BUSINESS ORGANIZATION:Sole Proprietorship, Joint Stock Company, Combination
  4. SOLE PROPRIETORSHIP AND ITS CHARACTERISTICS:ADVANTAGES OF SOLE PROPRIETORSHIP
  5. PARTNERSHIP AND ITS CHARACTERISTICS:ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP
  6. PARTNERSHIP (Continued):KINDS OF PARTNERS, PARTNERSHIP AT WILL
  7. PARTNERSHIP (Continued):PARTNESHIP AGREEMENT, CONCLUSION, DUTIES OF PARTNERS
  8. ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTS:ETHICS IN THE WORKPLACE, SOCIAL RESPONSIBILITY
  9. JOINT STOCK COMPANY:PRIVATE COMPANY, PROMOTION STAGE, INCORPORATION STAGE
  10. LEGAL DOCUMENTS ISSUED BY A COMPANY:MEMORANDUM OF ASSOCIATION, CONTENTS OF ARTICLES
  11. WINDING UP OF COMPANY:VOLUNTARY WIDNIGN UP, KINDS OF SHARE CAPITAL
  12. COOPERATIVE SOCIETY:ADVANTAGES OF COOPERATIVE SOCIETY
  13. WHO ARE MANAGERS?:THE MANAGEMENT PROCESS, BASIC MANAGEMENT SKILLS
  14. HUMAN RESOURCE MANAGEMENT:Human Resource Planning
  15. STAFFING:STAFFING THE ORGANIZATION
  16. STAFF TRAINING & DEVELOPMENT:Typical Topics of Employee Training, Training Methods
  17. BUSINESS MANAGERíS RESPONSIBILITY PROFILE:Accountability, Specific responsibilities
  18. COMPENSATION AND BENEFITS:THE LEGAL CONTEXT OF HR MANAGEMENT, DEALING WITH ORGANIZED LABOR
  19. COMPENSATION AND BENEFITS (Continued):MOTIVATION IN THE WORKPLACE
  20. STRATEGIES FOR ENHANCING JOB SATISFACTION AND MORALE
  21. MANAGERIAL STYLES AND LEADERSHIP:Changing Patterns of Leadership
  22. MARKETING:What Is Marketing?, Marketing: Providing Value and Satisfaction
  23. THE MARKETING ENVIRONMENT:THE MARKETING MIX, Product differentiation
  24. MARKET RESEARCH:Market information, Market Segmentation, Market Trends
  25. MARKET RESEARCH PROCESS:Select the research design, Collecting and analyzing data
  26. MARKETING RESEARCH:Data Warehousing and Data Mining
  27. LEARNING EXPERIENCES OF STUDENTS EARNING LOWER LEVEL CREDIT:Discussion Topics, Market Segmentation
  28. UNDERSTANDING CONSUMER BEHAVIOR:The Consumer Buying Process
  29. THE DISTRIBUTION MIX:Intermediaries and Distribution Channels, Distribution of Business Products
  30. PHYSICAL DISTRIBUTION:Transportation Operations, Distribution as a Marketing Strategy
  31. PROMOTION:Information and Exchange Values, Promotional Strategies
  32. ADVERTISING PROMOTION:Advertising Strategies, Advertising Media
  33. PERSONAL SELLING:Personal Selling Situations, The Personal Selling Process
  34. SALES PROMOTIONS:Publicity and Public Relations, Promotional Practices in Small Business
  35. THE PRODUCTIVITY:Responding to the Productivity Challenge, Domestic Productivity
  36. THE PLANNING PROCESS:Strengths, Weaknesses, Threats
  37. TOTAL QUALITY MANAGEMENT:Planning for Quality, Controlling for Quality
  38. TOTAL QUALITY MANAGEMENT (continued):Tools for Total Quality Management
  39. TOTAL QUALITY MANAGEMENT (continued):Process Re-engineering, Emphasizing Quality of Work Life
  40. BUSINESS IN DIGITAL AGE:Types of Information Systems, Telecommunications and Networks
  41. NON-VERBAL COMMUNICATION MODES:Body Movement, Facial Expressions
  42. BUSINESS ORGANIZATIONS:Organization as a System
  43. ACCOUNTING:Accounting Information System, Financial versus Managerial Accounting
  44. TOOLS OF THE ACCOUNTING TRADE:Double-Entry Accounting, Assets
  45. FINANCIAL MANAGEMENT:The Role of the Financial Manager, Short-Term (Operating) Expenditures