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MUHAMMAD DIN KHALIL

Introduction to Business II

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INTRODUCTION TO

CORPORATION

Chapter 1

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Introduction

Due to increase in the need of the people and development of human culture, business also got expansion.

Due to the deficiencies of sole trader ship and partnership another kind of business evolved that is called Joint Stock Company.

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Definition of a Corporation

A business which is having limited liability, can enter into a contract, can sue, can be sued, having perpetual succession and a common seal is called joint stock company or corporation.

It is formed and controlled under the company ordinance of the state. It is a very popular form of organization.

“A joint stock company is an artificial person recognized by law with a distinctive name, a common seal a common capital comprising transferable shares, carrying limited liability and having a perpetual succession

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Public corporation

Minimum number is 7 and there is no limit to maximum numbers.

Its share can be sold in the share market. Limited

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Private corporation

Minimum number is 2 and maximum is 50.Its share cant be sold in share market.

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Features of Joint Stock Company

There are some characteristics of Joint Stock company. Which are given step by step.

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1. Voluntary association of Persons

A company is a voluntary association of persons joining hands with a common motive.

For the formation of a Private Company, there must be at least two members and maximum limit is fifty.

In a Public Company, minimum number of members is seven and there is no restriction over its maximum number but cannot exceed the number of shares outstanding.

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2. Separate legal Entity:

Joint Stock Company has separated entity from its members.

It can sue (regester) in a court of law in its own name. Everybody knows only the name of the company and its address.

Nobody knows about the share holders and managers.

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3. Long Life:

A Joint Stock company has a long life as compared to the other forms of business organization if any share holders dies or withdraws his capital there is no affect on the continuity of company life.

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4. Limited liability:

The liability of each shareholder of the company is limited up to the value of the share purchased by him. In case of loss to the company, a shareholder cannot be called upon to pay more than the value of the shares held by him.

For example a person has purchased shares of a company having face value of Rs. Ten thousand. In case the company fails and whatever may be the losses of the company, the shareholder will be responsible to lose amount of not more than Rs. Thn thousands capital.

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5. Separation of ownership from management

The share-holders who are the owners of the company, are large in number. They are over the country or sometime outsides the country.

The shares holders therefore, elect the board of directors in its annual general meeting and entrust the management of the company to them.

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6. Transferability of shares

The shares of a company are transferable. The shareholders of a company have full freedom to transfer their shares to any one without other shareholders.

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7. Common Seal

A joint stock company cannot sign itself. A common seal with the name of the company is used as its signature.

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8. Payment of Double Taxes

First of all a company pays the tax on the whole profit. Secondly shareholders pay tax on their individual incomes.

So a joint stock company pays double taxes to the government.

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9. Government Control

A joint Stock company has to comply the rules of the Government. It has also to submit the various reports to registrar. A company has also to audit its accounts.

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Advantages of Company

Following are the advantages of Joint Stock Company: 

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1. Expansion of Business

A joint stock company sells the shares, debentures

 and bonds on large scale. So, a joint stock company can collect a large amount of capital

 and can expand its business. 

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2. Easy Access to Credit :

A joint stock company can get a huge amount of capital from banks and other institutions.

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3. Employment 

Joint stock companies are also playing very important role to provide employment to unemployed persons of the country. 

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4. 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.

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5. 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. 

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6. 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. 

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 7. Long Life 

A joint stock company has a permanent life. If one or more than one shareholder dies, or sells their shares, it makes no difference to the company. New shareholders take their place. 

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DISADVANTAGES OF JOINT STOCK COMPANY:

Some of the disadvantages of the joint stock company are given below:

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1. Initial Difficulties :

It is more difficult to establish a joint stock company as compared to other business organizations because there are many legal formalities to complete.

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2. 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. 

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3.  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 the person remains safe.  

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4. 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.  

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5. Lack of Freedom 

A joint stock company cannot perform its functions freely because it has to submit various reports to the registrar from time to time. 

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6. 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.

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7. 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. 

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Classification of Companies

The Company is divided in the following categories.

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1. Chartered Company

A company created by the grant of a Royal Charter is called Chartered Company. In England, these companies were formed and regulated by the Crown. Examples of chartered companies are the Chartered Bank of England, East India Company, these companies were incorporated by the Royal Charter. These companies are no more available.

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2. Statutory Companies

The companies created by a Special Act of legislative or under an ordinance are named as statutory companies. The State Bank of Pakistan, WAPDA is the example of such companies.

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3. Registered Companies

A company which is registered with the registrar of joint stock companies of a country is called as registered company. This type of companies having the following sub-types.

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a. Private Limited Company:

A Private limited company is an association of at least two members but the maximum number of them cannot exceed fifty. It restricts the right of its members to transfer their shares in the company. It also prohibits any invitation to the public to subscribe to its shares or debentures. It can be registered if it complies all the three restrictions mentioned above. A private limited company suits the needs of those persons who wish to take advantages of limited liability of its members and at the same time keep the business as private as possible.

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b. Public limited Company:

A public company must have at least seven members to form it. There is no restriction to the maximum number of members. Public company issues a prospectus for inviting people to purchase its shares. The liability of the members is limited to the value of shares purchased by them. The shares of public company are freely sold and purchased in the stock market.

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c. Single member company

A business which’s owner is single but having limited liability is called SMC. It is a new concept.

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Private limited company and its conversion into public limited company

A private limited company can be converted into public limited company by the following ways. By altering the article of association in the following points:

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Restricted right of transferring of its shares…………… Change this point

Limiting the number of its members to 50. …………. Change this point

Its member’s number shall be now at least 7.It shall file the altered Article of Association

within 14 days of alteration.

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PROMOTIONAND

FORMATION OF A JOINT STOCK COMPANY

Chapter:# 2