A corporation is an organization that is made up of many owners who normally are not active in the decision making and operations of the business. The capital of a limited liability company is divided into shares which are certificates of ownership (stock) issued by the corporation. The owners of these shares are called shareholders and the capital of the company referred to as share capital. Corporations must have at least one shareholder. Corporations are incorporated businesses, are considered as a separate entity, and this often provide a measure of legal and financial protection for the shareholders. The shareholders of corporations have limited liability protection, and corporations have full discretion over the amount of profits Suitability of Joint Stock Company:
A Limited Liability Company may be suitable where the volume of business is quite large, the area of operation is widespread, the risk involved is heavy and there is a need for huge financial resources and manpower. It is also preferred when there is need for professional management and flexibility of operations.
Characteristics of Limited Liability Companies
A Joint Stock Company is an artificial person in the sense that it is created by law and does not possess physical attributes of a natural person. However, it has a legal status.
Separate Legal Entity
Being an artificial person, a company has an existence independent of its members. It can own property, enter into contract and conduct any lawful business in its own name. It can sue and can be sued in the court of law. A shareholder cannot be held responsible for the acts of the company.
Every company has a common seal by which it is represented while dealing with outsiders. Any document with the common seal and duly signed by an officer of the company is binding on the company.
A company once formed continues to exist as long as it fullfils the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its members.
The liability of a member of a Joint Stock Company is limited by guarantee or the shares he owns. In other words, in case of payment of debts by the company, a shareholder is held liable only to the extent of his share.
Transferability of Shares
The members of a company are free to transfer the shares held by them to anyone else.
A Jamaican company for example, comes into existence only when it has been registered, after completing the formalities prescribed by The Registrar of Companies of Jamaica.
A company having a minimum membership of two persons and maximum fifty is known as a Private Limited Company. In the case of a Public Limited Company, the minimum is seven and the maximum membership is unlimited.
Limited Liability Companies have democratic management and control. Even though the shareholders are the owners of the company, all of them cannot participate in the management process. The company is managed by the elected representatives of shareholders known as Directors.
A Limited Liability Company generally raises a large amount of capital through issue of shares.
Advantages of Limited liability Companies
In a Joint Stock Company the liability of its members is limited to the extent of shares held by them. This attracts a large number of small investors to invest in the company. It helps the company to raise huge capital. Because of limited liability, a company is also able to take larger risks.
Continuity of existence
A company is an artificial person created by law and possesses independent legal status. It is not affected by the death, insolvency etc. of its members. Thus it has a perpetual existence.
Benefits of large scale operation
It is only the company form of organization which can provide capital for large scale operations. It results in large scale production consequently leading to increase in efficiency and reduction in the cost of operation. It further opens the scope for expansion.
Companies, because of complex nature of activities and operations and large volume of business, require professional managers at every level of organization. And because of their financial strength they can afford to appoint such managers. This leads to efficiency.
Corporations offer employment to a large number of people. It facilitates promotion of various ancillary industries, trade and auxiliaries to trade. Sometimes it also donates money for education, health, community service and renders help to charitable and social institutions.
Research and Development
A company generally invests a lot of money on research and development for improved processes of production, designing and innovating new products, improving quality of product, new ways of training its staff, etc.
Disadvantages of Limited liability Companies
Formation is not easy
The formation of a company involves compliance with a number of legal formalities under the companies Act and compliance with several other Laws.
Control by a Group
Companies are controlled by a group of persons known as the Board of Directors. This may be due to lack of interest on the part of the shareholders who are widely dispersed; ignorance, indifference and lack of proper and timely information. Thus, the democratic virtues of a company do not really exist in practice.
Speculation and Manipulation
The shares of a company are purchased and sold in the stock exchanges. The value or price of a share is determined in terms of the dividend expected and the reputation of the company. These can be manipulated.
Excessive government control
A company is expected to comply with the provisions of several Acts. Non-compliance of these invites heavy penalty. This affects the smooth functioning of the companies.
Delay in Policy Decisions
A company has to fulfill certain procedural formalities before making a policy decision. These formalities are time consuming and, therefore, policy decisions may be delayed.