Overview: Joint Stock Company
In simpler terms, A Joint Stock Company is a company that is owned by its investors; these shareholders own a share of the company, which is freely transferable and the investors have limited liability. It has a separate legal entity that is created by law operates in its own name. Joint Stock Companies was introduced to enable a company to thrive, as they are not too expensive
as compared to other kinds of companies (i.e., sole proprietorship or partnership), and the owners of such companies are expected to share the profit with their shareholders with respect to the number of shares that an investor owns.
Joint Stock Companies are also commonly known as corporations, public companies, or limited companies.
Types of Joint Stock Company
There are 3 types of Joint Stock Companies, namely:
1. Chartered Company
Chartered Company is not formed in present days; they used to be formed before 1844. Chartered Company is a company that is incorporated by the king or the head of the state. These kinds of companies are usually found in countries that have a monarchy; chartered companies used to have exclusive rights and privileges as they used to come into existence with the help of the power rooted in the hands of a king. Examples of Chartered companies are Bank of England, East India Company, the charter of the British South Africa Company.
2. Statutory company
Companies that are formed by order of a Prime Minister, General President, or it comes into existence by the special act of the legislature. Such an entity’s power, task, responsibilities are all stated through the act. These kinds of companies come into existence to carry on some business that is important for a nation.
3. Registered Company
For companies that are incorporated under the companies act, its formation and regulations are governed by the Companies Act.
Features of Joint Stock Company
Separate legal entity
A company has its own legal identity, which is separate from its shareholders. It is known as an artificial person and has its own rights. Hence, A shareholder can’t bind a company by his acts, as the members and company are considered as two different individuals in the eyes of the law. A company can buy its property, borrow money, incur debts, enter into a contract or even file a case against its shareholders. In the same way, shareholders can also sue the company, and they won’t be responsible for the debt taken by the company.
One of the most attractive features of a Joint Stock Company is its limited liability. The liability of the shareholders will be limited to the value of their shares. For example, if a company makes a loss and cannot pay its creditors, then shareholders won’t pay anything more than the value of their shares. Shareholders won’t be personally liable, and their personal property won’t be used to recover the dues of the company.
Every shareholder will have the right to transfer their shares without consulting it with other shareholders, the shares of the Joint Stock Company are listed in the stock exchange; hence they can easily be purchased or sold through stock exchanges.
A company and shareholders are considered as two different individuals, and it is established by law; hence only law can bring it to an end. There won’t be any interruption due to the death, retirement, insolvency of any shareholder; it won’t affect the existence of the company.
Although a company is considered to have its own separate identity as an artificial person, it can’t put its signature as a real person. The common seal acts as the official signature of a company, and it binds the company for its acts. The law requires every company to have its common seal, and it must be affixed on all the important documents; any document that doesn’t have the common seal of a company won’t be binding to the company.
Read more: Common Seal of Company
Publication of financial statements
A Joint-stock company should publish its audited financial statement so that it can provide information to the shareholders about the company’s revenue, expenses, debt, and profitability.
Separation of ownership and control
A company will have multiple shareholders, who will be considered as the owners of the company, but they won’t be able to take part in day-to-day activities. Ownership will be with shareholders, but control will be in the hands of the board of directors, who will be elected by shareholders as their representatives.
Benefits of Joint Stock Company
Large financial resources
There are different types of organizations apart from Joint Stock Companies, namely partnership, and a sole proprietorship, but only through Joint Stock Company one can accumulate large financial resources. The reason being a Joint Stock Company is capable of raising funds by issuing shares and debentures which can be bought by people.
A company can have any number of members; hence the capital will be divided into a large number of shares of small value. Unlike in partnership and a sole proprietorship, there are a limited number of partners who are responsible for raising funds.
Having limited liability encourages people to invest in a company as they will get a share of the profit if the company grows, but they won’t have to pay anything more than the value of their shares. It also allows the management of the company to take risks and undertake big operations.
As a company has a large number of shareholders, risk will be borne by all the shareholders; hence the burden of risk isn’t huge for an individual. It also encourages the investors to invest more, as they won’t be the only ones who will be taking risks. While the same can’t be said for sole proprietorship or partnership business,
Scope for growth and expansion
As a company has large financial resources, it can operate on a large scale, and expansion can be done through issuing new shares and debentures, there’s a huge scope for growth and expansion.
Perpetual Succession and having a separate legal identity makes a company stable as it offers continuous existence.
A Joint Stock Company usually employs experts to manage its business, as there are so many people whose money is at stake. The board of directors is elected by shareholders as their representatives, and they are mostly people who have years of experience. Hence the company can utilize their specialization in the most effective and efficient manner.
Joint Stock Company comes into existence through law and is supervised by legal authorities. Hence there is no chance for fraud and misconduct. Its accounts are audited by auditors, and financial statements are published yearly, which helps in creating confidence in the public about the functionality of the company.
Investing in Joint Stock Companies can be a great medium to grow funds, as it is being supervised by legal authority, professional management uses their skills and knowledge, and these shares offer limited risk.
Drawbacks of Joint Stock Company
Conflicts of interest
Conflicts of interest is the most obvious drawback of a Joint Stock Company, as there are various groups in a company who have different powers, voting rights, and shares. The decisions of majority shareholders influence the operations; decisions of minority shareholders might not be considered, which might raise a conflict. Apart from that, there might be conflicts between shareholders and management as well, which will end up creating misunderstandings and disputes.
Delay in decision making
There are times when a business needs to take a quick decision in order to grab an opportunity, but in a Joint Stock Company, it’s not possible. This can be one of the biggest drawbacks of a Joint Stock Company; when all the important decisions are either made by the board of directors through Annual General meetings, this delay in decision making might make them lose a big opportunity. While on the other hand, in partnership and a sole proprietorship, prompt decisions are possible.
Separation of ownership and control
As shareholders can’t participate in day to day activities of a company, there is no guarantee that the management is working efficiently.
The formation of a company is a time-consuming, expensive, and as well as complicated process. There are many legal documents that need to be filled and submitted to the registrar. The procedure that is required to be followed to form a company is extremely long; one cannot commence business until they receive a certificate of incorporation and a certificate to commence business.
Lack of secrecy
Maintaining secrecy in a Joint Stock Company is difficult, as it is mandatory to publish financial statements, minutes of meetings, and various reports to the registrar. And every issue is discussed in the meeting of the board of directors, even employees might leak out confidential information, so trade secrets can’t be maintained.
Corruption and Fraud
Not every Joint Stock Company follows ethical practices; some might present a fake bright image of their company in order to gain the public’s confidence to attract their capital. Sometimes a company can even form groups to get a monopoly and have power over the voting rights and can manipulate the decisions for their selfish reasons.
Memorandum of Association – It’s a legal document that provides a description of the company.
Article of Association – The document that contains all the rules and regulations regarding internal management and daily activities of the company.
Prospectus – Document that is issued by a company to raise capital.
Yes, It’s compulsory for Joint Stock companies to register. Joint-stock companies should gather the documents and submit them to the Registrar of companies.
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