The Company Law Business Law - Commercial Law

1. The Company Law

2. Meaning of Joint Stock Company
In partnership firm we know that the number of partners cannot exceed 20, so there is a limit to the
contribution of capital, secondly, even if the partners could contribute a large amount of capital, they
would hesitate to do so considering the risk involved in business and their unlimited liabilities. Mainly to
take care of these two problems, a company form of business organization came into existence.
A company form of business organization is known as 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 foam of business usually requires huge amount of capital
investment, which is contributed by its shareholders. The total capital of joint stock company is called
share capital and its divided into a number of units called shares.

3. Definition of Joint Stock Company
A joint stock company is ‘an association of many
persons who contribute money or money’s worth to a
common stock and employ it for a common purpose’.
Joint Stock Company is a new venture in the big
business area. After industrial revolution, there must be
changed in the production system.

4. Definition of 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.

5. Definition of Joint Stock
Company
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.”

6. Characteristics of Joint Stock
Company
1. 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 its has been registered after
completion of all formalities required by Companies act.

7. Characteristics of Joint Stock
Company
2. Artificial legal person:
A company is a creation of law and is called an artificial person. It exists only in the
contemplation of law, and therefore, has no physical form. However, law grants it the right to act as a
natural being — through a board of directors elected by the shareholders.

8. Characteristics of Joint Stock
Company
3. Perpetual succession:
A company has unending life quite independent of the life of its members. The death,
insolvency, or exit of any shareholder has no effect on the life of a company. “During the war all
the members of one private company, while in general meeting, were killed by a bomb.
The common saying in this regard is “members may come, members may go, but the company
goes on forever”. Law creates it and law alone can dissolve it. However, sole proprietorships
and partnerships do not enjoy uninterrupted life. The proprietary business almost comes to an
end if anything happens to the proprietor

9. Characteristics of Joint Stock
Company
4. Transferability of shares:
The shares of a public limited company are freely transferable and can be purchased and
sold through the stock exchanges. A shareholder of a public limited company can transfer his shares
without the consent of other shareholders. But there are certain restrictions on transferability of
shares in case of private limited company.

10. Characteristics of Joint Stock
Company
5. Limited liability:
The liabilities of a shareholder of a company are usually limited. For satisfaction of the debts
of the company, the personal property of the shareholder cannot be used. A shareholder’s liability is
limited to the amount unpaid on their shares, irrespective of the magnitude of losses suffered.

11. Characteristics of Joint Stock
Company
6. Separation of ownership from management:
The shareholders are the owners of the company. They are heterogeneous group of
people who are widely scattered throughout the country and abroad. The shareholders elect
their representatives called directors to manage the company. Thus, the company is managed by
directors rather than the shareholders. This results in separation of ownership from
management.

12. Characteristics of Joint Stock
Company
7. Investment facilities:
A joint stock company raises its funds through issue of shares to general public. Due to
the small denomination of the shares, the company provides investment opportunities to all
sections of people who want to put their surplus money in the company's share
8. Accountability:
A joint stock company has to function as per the provisions of the Companies Act. The
accounts are to be audited by qualified auditors. Such accounts and exports are published for the
information of all stakeholders. Regular and timely reports are to be submitted to the
Government.

13. Characteristics of Joint Stock
Company
9. Distinct legal entity:
A company being created under law has a separate entity from its members. A member
cannot bind a company by his acts or dealings with the third parties. The company can file a suit
against its members and its shareholders can also sue the company. Further, a shareholder is not
liable for the acts of the company even though he may be holding all the shares of that company.

14. Advantages of Joint Stock Company
Following are few advantages of Joint Stock Company.
1. Limited Liability : Liability of members of Joint Stock Company is limited to the extent of shares
held by them. Hence shareholders assets will not be on stake. This feature attracts large number of
investors to invest in the company.
2. Perpetual Existence : A company is an artificial legal person created by law which has its own
independent legal status. Its existence is not affected by the death or insolvency of its members.
3. Large Scale Operation : The capacity of the corporate organizations to raise the funds is
comparatively high which provide capital for large scale operations. Hence opens the scope for
expansion.

15. Advantages of Joint Stock Company
4. Transferability of Shares : In a joint stock company it is easy to transfer shares to anyone. But the same is
not permitted to private limited company.
5. Raising of Funds : It is easy to raise a large amount of funds as the number of persons contributing to the
capital are more.
6. Social Benefit : It offers employment to a large number of people. It facilitates promotion of various
ancillary industries. It also donates money for education, community service.
7. Research and Development : It invests a lot of money on research and development for improved
production process, improving quality of product, designing and innovating new products etc.

16. Disadvantages of Joint Stock
Company:
Following are the few disadvantages of Joint Stock Company:
1. Formation is not easy : To act as a legal entity a company has to fulfill various legal and procedural
formalities making it a complicated process.
2. Double Taxation : This is the biggest disadvantage which the company faces. Firstly, company needs
to pay tax for the earned profits and again the shareholders are taxed for the earned income.
3. Control by Board of Directors : After electing directors of the company which manage the business
for the company the shareholders become ignorant of their responsibilities. This may be due to lack of
interest and lack of proper and timely information.

17. Disadvantages of Joint Stock
Company:
4. Excessive Government Control : A company has to comply with provisions of several acts,
non-compliance of which can cause a company heavy penalty. This affects the smooth
functioning of a company.
5. Delay in Policy Decisions : All the legal and procedural formalities which are required to fulfill
before making policies of the company delay the policy decisions.
6. Speculation and Manipulation: As the shares of a joint stock company are easily transferable
thus the shares are purchased and sold in the stock exchanges on the value or price of a share
based on the expected dividend and the reputation of the company.
7. Corruption There are the several chances of corruption. Managers and directors
may shape the policies for their personal interest

18. Kinds of company/classifications of company:

19. 1. Chartered company A company which is formed by the royal orders is called chartered
company. This type of company is not formed in present world. Examples of such type of
companies are chartered bank of England, east India bank.
2. Statutory company A company formed by order of president, governor general or prime
minister is called statutory company. National bank of Pakistan, state bank of Pakistan is the
examples of statutory company.
3. Registered company
A company formed and registered under company’s ordinance 1984 is called registered
company.
A. According to Formation:

20. B. According to Ownerships:
1.Public limited company
A company which has right to issue shares to general public and liability of shares holder’s is
limited to the value of their share in company. there is no limit of maximum number of members.
2.Private limited company
A company which cannot issue shares to general public and the liability of share holder’s is
limited to the value of their share in company. Minimum number of members in private company
must be two and maximum is fifty.

21. B. According to Ownership:
3.Holding company A company which buys 50% or above shares of other company is
called holding company or parent company
4.Subsidiary company
A company whose 50% shares are held by an another company is called Subsidiary
Company.
5.Government company
Company which sells 50% shares to government is called Government Company

22. C. According to Liability
1. Company limited by guarantee
A company whose members give the guarantee to pay a specific amount on winding up of
company is called company limited by guarantee.
2. Company limited by shares
A company in which liability of share holder’s is limited to the value of their share in
company is called company limited by shares. Company limited by shares has two types: public
limited company and private limited company
3. Unlimited company
A company in which liability of share holder is unlimited, it means that the personal property
of share holder’s can be sold to pay the debts of company. This type of company does not exist in
Pakistan

23. D. According to nationality
Foreign company
A company which is registered and having head office outside Pakistan outside Pakistan
is called Foreign Company
Domestic company
A company which is formed and registered inside Pakistan is called domestic company.

24. Difference between Public Limited and Private Limited Company
Private Limited Company Public Limited Company
There must be minimum 2 members and
maximum limit is 50
There must be minimum 7 members and no
limit for the maximum members
Members of private company cannot transfer
their share
Members of public ltd company can freely
transfer shares to other person
Private company cannot issue shares to general
public
Public company has right to issue share to
general public for raising funds
A private company cannot issue debentures for
the fund raising
Public company has right to issue share for fund
raising
There must be at least two directors There must be at least seven directors
Private company cannot issue prospectus to
general public for subscription in shares
Public ltd company has right to issue prospectus
to general public

25. Procedure for the formation or
incorporation of Joint Stock Company