Sole Proprietorship
'Sole' means single and 'proprietorship' means ownership. It means only one person or
an individual becomes the owner of the business. Thus, the business organisation in
which a single person owns, manages and controls all the activities of the business is
known as sole proprietorship form of business organisation. The individual who owns
Business Studiesand runs the sole proprietorship business is called a ‘sole proprietor’ or ‘sole trader’
Definition of Sole Proprietorship:
We can now define sole proprietorship as–
A business enterprise exclusively owned, managed and controlled by a single
person with all authority, responsibility and risk.
Characteristics of Sole Proprietorship:
Sole proprietorship form of business organisations have the following characteristics.
i. Single Ownership: A single individual always owns sole proprietorship form of
business organization. That individual owns all assets and properties of the business.
Consequently, he alone bears all the risk of the business.
ii. No sharing of Profit and Loss : The entire profit arising out of sole proprietor Sole
Proprietorship ship business goes to the sole proprietor. If there is any loss it is also to be borne
by the sole proprietor alone. Nobody else shares the profit and loss of the business
with the sole proprietor.
iii. One man’s Capital : The capital required by a sole proprietorship form of
business organisation is totally arranged by the sole proprietor. He provides it
either from his personal resources or by borrowing from friends, relatives, banks
or other financial institutions.
iv. One-man Control: The controlling power in a sole proprietorship business
always remains with the owner. The owner or proprietor alone takes all the
decisions to run the business.
v. Unlimited Liability: The liability of the sole proprietor is unlimited. This implies
that, in case of loss the business assets along with the personal properties of the
proprietor shall be used to pay the business liabilities.
vi. Less Legal Formalities: The formation and operation of a sole proprietorship
form of business organisation requires almost no legal formalities. It also does not
require to be registered.
Advantages of Sole Proprietorship:
The sole proprietorship form of business is the most simple and common in our country.
It has the following advantages:
i. Easy to Form and Wind up: A sole proprietorship form of business is very easy
to form. With a very small amount of capital you can start the business. There is
no need to comply with any legal formalities except for those businesses which
required licence from local authorities or health department of government.
ii. Direct Motivation: The profits earned belong to the sole proprietor alone and
he bears the risk of losses as well. Thus, there is a direct link between effort and
reward. This provides strong motivation for the sole proprietor to work hard.
iii. Quick Decision and Prompt Action: In a sole proprietorship business the sole
proprietor is free to take any decision on his own. Since no one else is involved in
decision making it becomes quick and prompt action can be taken on the basis of
this decision.
iv. Better Control: In sole proprietorship business the proprietor has full control
over each and every activity of the business. He is the planner as well as the
organiser, who co-ordinates every activity in an efficient manner. Since the
proprietor has all authority with him, it is possible to exercise better control over
business.
v. Maintenance of Business Secrets: Business secrecy is an important factor for
every business. It refers to keeping the future plans, technical competencies,
business strategies,. In the case of sole proprietorship business, the proprietor is in a very good position to keep his plans to himself since management and control are in his hands. There is no need to disclose any information to others.
vi. Close Personal Relation: The sole proprietor is always in a position to maintain
good personal contact with the customers and employees. Direct contact enables
the sole proprietor to know the individual likes, dislikes and tastes of the
customers. Also, it helps in maintaining close and friendly relations with the
employees and thus, business runs smoothly.
vii. Flexibility in Operation: A sole proprietor can expand or curtail his business according to the requirement. Suppose, as the owner of a bookshop, you have been selling books for school
students. If you want to expand your business you can decide to sell stationery
items like pen, pencil, register, etc.
viii. Encourages Self-employment: Sole proprietorship form of business organisation
leads to creation of employment opportunities for people. Not only is the owner
self-employed, sometimes he also creates job opportunities for others.
Limitations of Sole Proprietorship:
Still there are certain disadvantages too. Let us learn those limitations.
i. Limited Capital: In sole proprietorship business, it is the owner who arranges
the required capital of the business. It is often difficult for a single individual to
raise a huge amount of capital.
ii. Unlimited Liability: In case the sole proprietor fails to pay the business
obligations and debts arising out of business activities, his personal properties
may have to be used to meet those liabilities.
iii. Lack of Continuity: The existence of sole proprietorship business is linked to
the life of the proprietor. Illness, death or insolvency of the owner brings an end to
the business. The continuity of business operation is therefore uncertain.
iv. Limited Size: It is not always possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.
v. Lack of Managerial Expertise: A sole proprietor may not be an expert in
every aspect of management. He/she may be an expert in administration,
planning, etc., but may be poor in marketing. Again, because of limited financial
resources it is also not possible to employ a professional manager.
It is basically a relation between two or more persons who join hands to form a business
organisation with the objective of earning profit. The persons who join hands are
individually known as ‘Partner’ and collectively a ‘Firm’. The name under which the
business is carried on is called ‘firm name’.The partners provide the necessary capital, run the business jointly and share the responsibility.
Defines partnership as “a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.
Features of Partnership form of business organization:
After having a brief idea about partnership, let us identify the various features of this form of
Business organization.
i. Two or more Members - You know that the members of the partnership firm are
called partners. At least two members are required to start a partnership business.
But the number of members should not exceed 10 in case of banking business and 20
in case of other business.
ii. Agreement: This agreement contains the amount of capital contributed by each partner;
o profit or loss sharing ratio;
o salary or commission payable to the partner, if any;
o duration of business, if any ;
o name and address of the partners and the firm;
o duties and powers of each partner;
o nature and place of business; and
o any other terms and conditions to run the business.
iii. Lawful Business: The partners should always join hands to carry on any kind of
lawful business. To indulge in smuggling, black marketing, etc., cannot be called
partnership business in the eye of the law.
iv. Competence of Partners: Since individuals join hands to become the partners, it is
necessary that they must be competent to enter into a partnership contract. Thus,
minors, lunatics and insolvent persons are not eligible to become the partners.
However, a minor can be admitted to the benefits of partnership i.e., he can have a
share in the profits only.
v. Sharing of Profit - The main objective of every partnership firm is sharing of profits
of the business amongst the partners in the agreed proportion. In the absence of any
agreement for the profit sharing, it should be shared equally among the partners.
vi. Unlimited Liability - Just like the sole proprietor the liability of partners is also
unlimited. That means, if the assets of the firm are insufficient to meet the liabilities, the
personal properties of the partners, if any, can also be utilized to meet the business
liabilities.
vii. No Separate Legal Existence - Just like sole proprietorship, partnership firm also
has no separate legal existence from that of it owners. Partnership firm is just a name
for the business as a whole.
viii. Restriction on Transfer of Interest - No partner can sell or transfer his interest to
anyone without the constant of other partners.
ix. Continuity of Business - A partnership firm comes to an end in the event of
death, lunacy or bankruptcy of any partner. Even otherwise, it can discontinue its
business at the will of the partners. At any time, they may take a decision to end their
relationship.
Advantages of partnership form of business organization:
Partnership form of business organization has certain advantages, which are as follows
a) Easy to form: Like sole proprietorship, the partnership business can be formed
easily without any legal formalities. It is not necessary to get the firm registered.
A simple agreement, either oral or in writing, is sufficient to create a partnership
firm.
b) Availability of large resources - Since two or more partners join hand to start
partnership business it may be possible to pool more resources as compared to
sole proprietorship. The partners can contribute more capital, more effort and also
more time for the business.
c) Better decisions - The partners are the owners of the business. Each of them has
equal right to participate in the management of the business. In case of any conflict
they can sit together to solve the problems. Since all partners participate in
decision-making, there is less scope for reckless and hasty decisions.
d) Flexibility in operations - The partnership firm is a flexible organization. At any time
the partners can decide to change the size or nature of business or area of its
operation. There is no need to follow any legal procedure.
e) Sharing risks - In a partnership firm all the partners share the business risks.
f) Protection of interest of each partner - In a partnership firm every partner has an
equal say in decision making. If any decision goes against the interest of any partner
he can prevent the decision from being taken. In extreme cases a dissenting partner
may withdraw himself from the business and can dissolve it.
g) Benefits of specialization - Since all the partners are owners of the business they
can actively participate in every aspect of business as per their specialization and
knowledge.
.
Limitations of Partnership form of Business Organization:
Inspite of all these advantages as discussed above, a partnership firm also suffers from
certain limitations. Let us discuss all these limitations.
a) Unlimited Liability: All the partners are jointly as well as separately liable for the
debt of the firm to an unlimited extent. Thus, they can share the liability among themselves
or any one can be asked to pay all the debts even from his personal properties.
b) Uncertain Life: The partnership firm has no legal entity separate from its partners. It
comes to an end with the death, insolvency, incapacity or the retirement of any partner.
Further, any dissenting member can also give notice at any time for dissolution of
partnership.
c) Lack of Harmony: You know that in partnership firm every partner has an equal right
to participate in the management. Also every partner can place his or her opinion or
viewpoint before the management regarding any matter at any time. Because of this
sometimes there is a possibility of friction and quarrel among the partners. Difference
of opinion may lead to closure of the business on many occasions.
d) Limited Capital: Since the total number of partners cannot exceed 20, the capital to
be raised is always limited. It may not be possible to start a very large business in
partnership form.
e) No transferability of share: If you are a partner in any firm you cannot transfer your
share of interest to outsiders without the consent of other partners. This creates inconvenience
for the partner who wants to leave the firm or sell part of his share to
others.
A company form of business organization is known as a Joint Stock Company. It is a
voluntary association of persons who generally contribute capital to carry on a particular
type of business, which is established by law and can be dissolved only by law. Persons
who contribute capital become members of the company. This form of business has a legal
existence separate from its members, which means even if its members die, the company
remains in existence. This form of business organizations generally requires huge capital
investment, which is contributed by its members. The total capital of a joint stock company
is called share capital and it is divided into a number of units called shares. Thus, every
member has some shares in the business depending upon the amount of capital contributed
by him. Hence, members are also called shareholders.
Characteristics of Joint Stock Company:
You are now familiar with the concept of company as a form of business organization. Let us
now study its characteristics.
i. Legal formation: No single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company comes into existence only when it has been registered after completion of all formalities required by the Indian Companies Act, 1956.
ii. Artificial person: Just like an individual, who takes birth, grows, enters into relationships and dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is called an artificial person as its birth, existence and death are regulated by law and it does not possess physical attributes like that of a normal person.
iii. Separate legal entity: Being an artificial person, a joint stock company has its own separate existence independent of its members. It means that a joint stock company can own property, enter into contracts and conduct any lawful business in its own name. It can sue and can be sued by others in the court of law. The shareholders are not the owners of the property owned by the company. Also, the shareholders cannot be held responsible for the acts of the company
iv. Common seal: A joint stock company has a seal, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organization working on behalf of the company. Any document, on which the
company's seal is put and is duly signed by any official of the company, become binding on
the company.
v. Perpetual existence: A joint stock company continues to exist as long as it fulfils the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its members.
vi. Limited liability: In a joint stock company, the liability of a member is limited to the extent of the value of
shares held by him.
vii. Democratic management: Joint stock companies have democratic management and control. That is, even though the
shareholders are owners of the company, all of them cannot participate in the management
of the company. Normally, the shareholders elect representatives from among themselves
known as ‘Directors’ to manage the affairs of the company.
Advantages of Joint Stock Company:
The main advantages of Joint Stock Company are -
(i) Large financial resources: A joint stock company is able to collect a large amount
of capital through small contributions from a large number of people. In public limited
company shares can be offered to the general public to raise capital. They can also
accept deposits from the public and issue debentures to raise funds.
(ii) Limited Liability: In case of a company, the liability of its members is limited to the
extent of the value of shares held by them.
(iii) Professional management: Management of a company is vested in the hands of
directors, who are elected democratically by the members or shareholders. These
directors as a group known as Board of Directors ( or simply Board) manage the
affairs of the company and are accountable to all the members.
(iv) Large-scale production: Due to the availability of large financial resources and
technical expertise it is possible for the companies to have large-scale production. It
enables the company to produce more efficiently and at lower cost.
(v) Contribution to society: A joint stock company offers employment to a large number
of people. It facilitates promotion of various ancillary industries, trade and auxiliaries
to trade. Sometimes it also donates money towards education, health and
community services.
(vi) Research and Development: Only in company form of business it is possible to
invest a lot of money on research and development for improved processes of production,
new design, better quality products, etc. It also takes care of training and
development of its employees.
Limitations of Joint Stock Company:
In spite of many advantages of the company form of business organization, it also suffers
from some limitations. Let us note the limitations of Joint Stock Companies.
(i) Difficult to form: The formation or registration of joint stock company involves a
complicated procedure. A number of legal documents and formalities have to be
completed before a company can start its business. It requires the services of
specialists such as Chartered Accountants, Company Secretaries, etc. Therefore,
cost of formation of a company is very high.
(ii) Excessive government control: Joint stock companies are regulated by
government through Companies Act and other economic legislations. Particularly,
public limited companies are required to adhere to various legal formalities as
provided in the Companies Act and other legislations.
(iii) Delay in policy decisions: Generally policy decisions are taken at the Board
meetings of the company. Further the company has to fulfill certain procedural
formalities. These procedures are time consuming and therefore, may delay action
on the decisions.
(iv) Concentration of economic power and wealth in few hands: A joint stock
company is a large-scale business organization having huge resources. Any
misuse of such power creates unhealthy conditions in the society, having monopoly over a particular business or industry or product; exploitation of workers, consumers and investors.
'Sole' means single and 'proprietorship' means ownership. It means only one person or
an individual becomes the owner of the business. Thus, the business organisation in
which a single person owns, manages and controls all the activities of the business is
known as sole proprietorship form of business organisation. The individual who owns
Business Studiesand runs the sole proprietorship business is called a ‘sole proprietor’ or ‘sole trader’
Definition of Sole Proprietorship:
We can now define sole proprietorship as–
A business enterprise exclusively owned, managed and controlled by a single
person with all authority, responsibility and risk.
Characteristics of Sole Proprietorship:
Sole proprietorship form of business organisations have the following characteristics.
i. Single Ownership: A single individual always owns sole proprietorship form of
business organization. That individual owns all assets and properties of the business.
Consequently, he alone bears all the risk of the business.
ii. No sharing of Profit and Loss : The entire profit arising out of sole proprietor Sole
Proprietorship ship business goes to the sole proprietor. If there is any loss it is also to be borne
by the sole proprietor alone. Nobody else shares the profit and loss of the business
with the sole proprietor.
iii. One man’s Capital : The capital required by a sole proprietorship form of
business organisation is totally arranged by the sole proprietor. He provides it
either from his personal resources or by borrowing from friends, relatives, banks
or other financial institutions.
iv. One-man Control: The controlling power in a sole proprietorship business
always remains with the owner. The owner or proprietor alone takes all the
decisions to run the business.
v. Unlimited Liability: The liability of the sole proprietor is unlimited. This implies
that, in case of loss the business assets along with the personal properties of the
proprietor shall be used to pay the business liabilities.
vi. Less Legal Formalities: The formation and operation of a sole proprietorship
form of business organisation requires almost no legal formalities. It also does not
require to be registered.
Advantages of Sole Proprietorship:
The sole proprietorship form of business is the most simple and common in our country.
It has the following advantages:
i. Easy to Form and Wind up: A sole proprietorship form of business is very easy
to form. With a very small amount of capital you can start the business. There is
no need to comply with any legal formalities except for those businesses which
required licence from local authorities or health department of government.
ii. Direct Motivation: The profits earned belong to the sole proprietor alone and
he bears the risk of losses as well. Thus, there is a direct link between effort and
reward. This provides strong motivation for the sole proprietor to work hard.
iii. Quick Decision and Prompt Action: In a sole proprietorship business the sole
proprietor is free to take any decision on his own. Since no one else is involved in
decision making it becomes quick and prompt action can be taken on the basis of
this decision.
iv. Better Control: In sole proprietorship business the proprietor has full control
over each and every activity of the business. He is the planner as well as the
organiser, who co-ordinates every activity in an efficient manner. Since the
proprietor has all authority with him, it is possible to exercise better control over
business.
v. Maintenance of Business Secrets: Business secrecy is an important factor for
every business. It refers to keeping the future plans, technical competencies,
business strategies,. In the case of sole proprietorship business, the proprietor is in a very good position to keep his plans to himself since management and control are in his hands. There is no need to disclose any information to others.
vi. Close Personal Relation: The sole proprietor is always in a position to maintain
good personal contact with the customers and employees. Direct contact enables
the sole proprietor to know the individual likes, dislikes and tastes of the
customers. Also, it helps in maintaining close and friendly relations with the
employees and thus, business runs smoothly.
vii. Flexibility in Operation: A sole proprietor can expand or curtail his business according to the requirement. Suppose, as the owner of a bookshop, you have been selling books for school
students. If you want to expand your business you can decide to sell stationery
items like pen, pencil, register, etc.
viii. Encourages Self-employment: Sole proprietorship form of business organisation
leads to creation of employment opportunities for people. Not only is the owner
self-employed, sometimes he also creates job opportunities for others.
Limitations of Sole Proprietorship:
Still there are certain disadvantages too. Let us learn those limitations.
i. Limited Capital: In sole proprietorship business, it is the owner who arranges
the required capital of the business. It is often difficult for a single individual to
raise a huge amount of capital.
ii. Unlimited Liability: In case the sole proprietor fails to pay the business
obligations and debts arising out of business activities, his personal properties
may have to be used to meet those liabilities.
iii. Lack of Continuity: The existence of sole proprietorship business is linked to
the life of the proprietor. Illness, death or insolvency of the owner brings an end to
the business. The continuity of business operation is therefore uncertain.
iv. Limited Size: It is not always possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.
v. Lack of Managerial Expertise: A sole proprietor may not be an expert in
every aspect of management. He/she may be an expert in administration,
planning, etc., but may be poor in marketing. Again, because of limited financial
resources it is also not possible to employ a professional manager.
Partnership
It is basically a relation between two or more persons who join hands to form a business
organisation with the objective of earning profit. The persons who join hands are
individually known as ‘Partner’ and collectively a ‘Firm’. The name under which the
business is carried on is called ‘firm name’.The partners provide the necessary capital, run the business jointly and share the responsibility.
Defines partnership as “a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.
Features of Partnership form of business organization:
After having a brief idea about partnership, let us identify the various features of this form of
Business organization.
i. Two or more Members - You know that the members of the partnership firm are
called partners. At least two members are required to start a partnership business.
But the number of members should not exceed 10 in case of banking business and 20
in case of other business.
ii. Agreement: This agreement contains the amount of capital contributed by each partner;
o profit or loss sharing ratio;
o salary or commission payable to the partner, if any;
o duration of business, if any ;
o name and address of the partners and the firm;
o duties and powers of each partner;
o nature and place of business; and
o any other terms and conditions to run the business.
iii. Lawful Business: The partners should always join hands to carry on any kind of
lawful business. To indulge in smuggling, black marketing, etc., cannot be called
partnership business in the eye of the law.
iv. Competence of Partners: Since individuals join hands to become the partners, it is
necessary that they must be competent to enter into a partnership contract. Thus,
minors, lunatics and insolvent persons are not eligible to become the partners.
However, a minor can be admitted to the benefits of partnership i.e., he can have a
share in the profits only.
v. Sharing of Profit - The main objective of every partnership firm is sharing of profits
of the business amongst the partners in the agreed proportion. In the absence of any
agreement for the profit sharing, it should be shared equally among the partners.
vi. Unlimited Liability - Just like the sole proprietor the liability of partners is also
unlimited. That means, if the assets of the firm are insufficient to meet the liabilities, the
personal properties of the partners, if any, can also be utilized to meet the business
liabilities.
vii. No Separate Legal Existence - Just like sole proprietorship, partnership firm also
has no separate legal existence from that of it owners. Partnership firm is just a name
for the business as a whole.
viii. Restriction on Transfer of Interest - No partner can sell or transfer his interest to
anyone without the constant of other partners.
ix. Continuity of Business - A partnership firm comes to an end in the event of
death, lunacy or bankruptcy of any partner. Even otherwise, it can discontinue its
business at the will of the partners. At any time, they may take a decision to end their
relationship.
Advantages of partnership form of business organization:
Partnership form of business organization has certain advantages, which are as follows
a) Easy to form: Like sole proprietorship, the partnership business can be formed
easily without any legal formalities. It is not necessary to get the firm registered.
A simple agreement, either oral or in writing, is sufficient to create a partnership
firm.
b) Availability of large resources - Since two or more partners join hand to start
partnership business it may be possible to pool more resources as compared to
sole proprietorship. The partners can contribute more capital, more effort and also
more time for the business.
c) Better decisions - The partners are the owners of the business. Each of them has
equal right to participate in the management of the business. In case of any conflict
they can sit together to solve the problems. Since all partners participate in
decision-making, there is less scope for reckless and hasty decisions.
d) Flexibility in operations - The partnership firm is a flexible organization. At any time
the partners can decide to change the size or nature of business or area of its
operation. There is no need to follow any legal procedure.
e) Sharing risks - In a partnership firm all the partners share the business risks.
f) Protection of interest of each partner - In a partnership firm every partner has an
equal say in decision making. If any decision goes against the interest of any partner
he can prevent the decision from being taken. In extreme cases a dissenting partner
may withdraw himself from the business and can dissolve it.
g) Benefits of specialization - Since all the partners are owners of the business they
can actively participate in every aspect of business as per their specialization and
knowledge.
.
Limitations of Partnership form of Business Organization:
Inspite of all these advantages as discussed above, a partnership firm also suffers from
certain limitations. Let us discuss all these limitations.
a) Unlimited Liability: All the partners are jointly as well as separately liable for the
debt of the firm to an unlimited extent. Thus, they can share the liability among themselves
or any one can be asked to pay all the debts even from his personal properties.
b) Uncertain Life: The partnership firm has no legal entity separate from its partners. It
comes to an end with the death, insolvency, incapacity or the retirement of any partner.
Further, any dissenting member can also give notice at any time for dissolution of
partnership.
c) Lack of Harmony: You know that in partnership firm every partner has an equal right
to participate in the management. Also every partner can place his or her opinion or
viewpoint before the management regarding any matter at any time. Because of this
sometimes there is a possibility of friction and quarrel among the partners. Difference
of opinion may lead to closure of the business on many occasions.
d) Limited Capital: Since the total number of partners cannot exceed 20, the capital to
be raised is always limited. It may not be possible to start a very large business in
partnership form.
e) No transferability of share: If you are a partner in any firm you cannot transfer your
share of interest to outsiders without the consent of other partners. This creates inconvenience
for the partner who wants to leave the firm or sell part of his share to
others.
Joint Stock Company
A company form of business organization is known as a Joint Stock Company. It is a
voluntary association of persons who generally contribute capital to carry on a particular
type of business, which is established by law and can be dissolved only by law. Persons
who contribute capital become members of the company. This form of business has a legal
existence separate from its members, which means even if its members die, the company
remains in existence. This form of business organizations generally requires huge capital
investment, which is contributed by its members. The total capital of a joint stock company
is called share capital and it is divided into a number of units called shares. Thus, every
member has some shares in the business depending upon the amount of capital contributed
by him. Hence, members are also called shareholders.
Characteristics of Joint Stock Company:
You are now familiar with the concept of company as a form of business organization. Let us
now study its characteristics.
i. Legal formation: No single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company comes into existence only when it has been registered after completion of all formalities required by the Indian Companies Act, 1956.
ii. Artificial person: Just like an individual, who takes birth, grows, enters into relationships and dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is called an artificial person as its birth, existence and death are regulated by law and it does not possess physical attributes like that of a normal person.
iii. Separate legal entity: Being an artificial person, a joint stock company has its own separate existence independent of its members. It means that a joint stock company can own property, enter into contracts and conduct any lawful business in its own name. It can sue and can be sued by others in the court of law. The shareholders are not the owners of the property owned by the company. Also, the shareholders cannot be held responsible for the acts of the company
iv. Common seal: A joint stock company has a seal, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organization working on behalf of the company. Any document, on which the
company's seal is put and is duly signed by any official of the company, become binding on
the company.
v. Perpetual existence: A joint stock company continues to exist as long as it fulfils the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its members.
vi. Limited liability: In a joint stock company, the liability of a member is limited to the extent of the value of
shares held by him.
vii. Democratic management: Joint stock companies have democratic management and control. That is, even though the
shareholders are owners of the company, all of them cannot participate in the management
of the company. Normally, the shareholders elect representatives from among themselves
known as ‘Directors’ to manage the affairs of the company.
Advantages of Joint Stock Company:
The main advantages of Joint Stock Company are -
(i) Large financial resources: A joint stock company is able to collect a large amount
of capital through small contributions from a large number of people. In public limited
company shares can be offered to the general public to raise capital. They can also
accept deposits from the public and issue debentures to raise funds.
(ii) Limited Liability: In case of a company, the liability of its members is limited to the
extent of the value of shares held by them.
(iii) Professional management: Management of a company is vested in the hands of
directors, who are elected democratically by the members or shareholders. These
directors as a group known as Board of Directors ( or simply Board) manage the
affairs of the company and are accountable to all the members.
(iv) Large-scale production: Due to the availability of large financial resources and
technical expertise it is possible for the companies to have large-scale production. It
enables the company to produce more efficiently and at lower cost.
(v) Contribution to society: A joint stock company offers employment to a large number
of people. It facilitates promotion of various ancillary industries, trade and auxiliaries
to trade. Sometimes it also donates money towards education, health and
community services.
(vi) Research and Development: Only in company form of business it is possible to
invest a lot of money on research and development for improved processes of production,
new design, better quality products, etc. It also takes care of training and
development of its employees.
Limitations of Joint Stock Company:
In spite of many advantages of the company form of business organization, it also suffers
from some limitations. Let us note the limitations of Joint Stock Companies.
(i) Difficult to form: The formation or registration of joint stock company involves a
complicated procedure. A number of legal documents and formalities have to be
completed before a company can start its business. It requires the services of
specialists such as Chartered Accountants, Company Secretaries, etc. Therefore,
cost of formation of a company is very high.
(ii) Excessive government control: Joint stock companies are regulated by
government through Companies Act and other economic legislations. Particularly,
public limited companies are required to adhere to various legal formalities as
provided in the Companies Act and other legislations.
(iii) Delay in policy decisions: Generally policy decisions are taken at the Board
meetings of the company. Further the company has to fulfill certain procedural
formalities. These procedures are time consuming and therefore, may delay action
on the decisions.
(iv) Concentration of economic power and wealth in few hands: A joint stock
company is a large-scale business organization having huge resources. Any
misuse of such power creates unhealthy conditions in the society, having monopoly over a particular business or industry or product; exploitation of workers, consumers and investors.
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