In a partnership, there can be a maximum of 20 people. Because of this limit, the amount of capital that can be generated is limited. Also, because of the unlimited liability of partnerships, the partners may be discouraged from taking huge risks and further expanding their business. To overcome these problems a public or a private company may be formed.
Private and public companies are much better investments because of “Limited liability”. This means that if an investor has invested Rs.1000/- in a particular company, and the company goes bankrupt, the investor only looses the money he has invested. To pay of the debt, the investors property, bank accounts etc. are "not" used.
Because of this limited liability, many investors are interested in investing in these private or public companies. Hence, a large capital can be generated and a huge business can be run.
The major disadvantage of Private and Public companies, is that they have a costly and elaborate process of setting up. They are also closely regulated by the government.
So what are Public or Private companies?
These companies are also know as “joint stock companies”. The companies in India are governed by the Indian Companies Act, 1956. The Act defines a company as an artificial person created by law, having a separate legal entity, with perpetual succession and a common seal.
What this means is that, the company “is different” from the investors. The investors put in money and capital is raised. But the company is treated as a virtual person. The company is treated as a person who is different from it’s investors. The company has an identity of it’s own. If some one sues the company, he does not sue the investors, he sues the virtual person that is the company.
To understand the concept of joint stock (private and public limited) companies, consider the following characteristics:
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 can come into
existence only when it has been registered after completion of all the
legal formalities required by the Indian Companies Act, 1956.
Artificial person:
Just like an individual 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 it’s birth, existence and death are
regulated by law.
Separate legal entity:
Being an artificial person, a joint stock company has its own separate
existence independent of it’s investors. This means that a
joint stock company can own property, enter into contracts and conduct
any lawful business in it’s “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 any of the acts of the company.
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, becomes binding on the company.
For example, a purchase manager may enter into a contract for buying raw materials from a supplier. Once the contract paper is sealed and signed by the purchase manager, it becomes valid. The purchase manager may leave the company or may be removed from his job or may have taken a wrong decision, yet, the contract is valid till a new contract is made or the existing contract expires.
Perpetual existence:
A joint stock company continues to exist as long as it fulfills the
requirements of law. It is not affected by the death, lunacy,
insolvency or retirement of any of it’s investors. For
example, in case of a private limited company having four members, if
all of them die in an accident, the company will
“not” be closed. It will continue to exist. The
shares of the company will be transferred to the legal heirs of the
members.
Limited liability:
In a joint stock company, the liability of a member is limited to the
amount he has invested. While repaying debts, for example, if a person
has invested only Rs.10,000 then only this amount that he has invested
can be used for the payment of debts. That is, even if there is
liquidation of the company, the personal property of the investor can
not be used to pay the debts and he will lose his investment worth
Rs.10,000.
Democratic management:
Joint stock companies have democratic management and control. Since in
joint stock companies there are thousands and thousands of investors,
all of them cannot participate in the affairs of management of the
company. Normally, the investors elect representatives from among
themselves known as ‘Directors’ to manage the
affairs of the company.
The above discription must have given you an idea about public and private limited companies in general. There are some special charecterstics of Public and Private limited companies that must be understood. There are given below.
Special charecerestics of Private Limited Comapnies
These companies can be formed by at least two individuals having minimum paid-up capital of not less than Rupees 1 lakh.
As per the Companies Act, 1956 the total membership of these companies cannot exceed 50.
The shares allotted to it’s members are also not freely transferable between them.
These companies are not allowed to raise money from the pub-lic through open invitation.
They are required to use “Private Limited” after their names.
The examples of such companies are Combined Marketing Services Private Limited, Indian Publishers and Distributors Private Limited etc.
Special charectersetics of Public Lmited Companies
A minimum of seven members are required to form a public limited company.
It must have minimum paid-up capital of Rs 5 lakhs.
There is no restriction on maximum number of members.
The shares allotted to the members are freely transferable.
These companies can raise funds from general public through open invitations by selling its shares or accepting fixed deposits.
These companies are required to write either ‘public limited’ or ‘limited’ after their names.
Examples of such companies are Hyundai Motors India Limited, Jhandu Pharmaceuticals Limited etc.
Next - Advantages of Joint Stock Companies >>
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Table Of Contents
- How to incorporate?
- Understanding Sole Proprietorships
- - Advantages of Sole Proprietorships
- - Disadvantages of Sole Proprietorships
- - What kind of business is suitable for Sole Proprietorships?
- - How to start a Sole Proprietorship business?
- Understanding Partnerships Business
- - Advantages of a Partnership Business
- - Disadvantages of a Partnership Business
- - Different types of partnership firms
- - Business suitable for Partnerships legal structure
- - How to form partnership deeds & start a partnership firm?
- Understanding Joint Stock Companies (Private & Public Ltd.)
- - Advantages of Joint Stock Companies
- - Disadvantages of Joint Stock Companies
- - Business suitable for Joint Stock Companies
- - Procedure to start a Joint Stock Company? (Incorporation)