What is a Joint Stock Company?
A Joint Stock Company is a type of business structure that is owned collectively by all stockholders. 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 and operates in its own name. Joint stock companies are created to facilitate business activities that were too costly for individuals to operate alone. As such, those investors who do not have enough funds to run a corporate alone can establish a JSC.
Profits, in a Joint Stock Company, are allocated to the investors, in accordance with the number of shares they own.
Joint Stock Companies are also commonly known as corporations, public companies, or limited companies.
History of Joint Stock Company
The concept of a joint stock company has roots in ancient times, but it took on its modern form during the Renaissance period in Europe. In the late 16th century, countries like England and the Netherlands experienced a surge in trade and exploration, creating a demand for large-scale investments.
One earliest documented example of a joint stock company is the Dutch East India Company, established in 1602. This company allowed individuals to invest in voyages to the East Indies, sharing the risks and rewards of the expeditions. Investors purchased shares, and profits were distributed proportionally among them.
The success of the Dutch East India Company sparked interest in other nations. In 1606, the London Company (later known as the Virginia Company) was founded in England to establish colonies in North America. It followed a similar model of joint stock ownership, attracting investors seeking to profit from ventures in the New World.
The formation of these companies brought about a significant shift in business organization. They allowed individuals to invest in ventures that surpassed their capabilities, spreading financial risks and fostering economic growth. Joint stock companies facilitated the pooling of capital and the sharing of profits, enabling the realization of large-scale projects that would have been unattainable for individual entrepreneurs.
Types of Joint Stock Company
Based on some criteria, Joint Stock Companies are classified as:
On the basis of Incorporation
1. Chartered Company
Chartered Company is not formed in present days; they used to be formed before 1844. A 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 the Bank of England, East India Cthe Company, and the British and South Africa Company.
2. Statutory company
Statutory companies are those that are established by a specific act of the Parliament. Such an entity’s power, task, and 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.
On the basis of Ownership
1. Government Company
It is a corporation in which the central or state government, or a combination of the two, owns at least 51% of the stock.
2. Non-Government Company
Private people or institutions own the bulk of the stock.
On the basis of Liability
1. Limited Liability Company:
This is the most frequent type of business ownership. The liability is limited to the value of the shares held by the shareholders.
2. Unlimited Liability Company:
Shareholders’ responsibilities in such a firm include personal property and assets.
3. Company Limited by Guarantee
In the event of liquidation, the shareholders must pay a set amount. The amount is specified in the Memorandum of Association.
On the basis of the Number of Members
1. Public Company:
A publicly traded corporation can have as many members as it wants, in most cases. Shares of the corporation may be bought and sold at any time. These businesses can also publicize the issuance of shares or debentures.
2. Private Company:
A private limited company meets the following three requirements: a) it has a set number of members as determined by the applicable Companies Act; b) it has restrictions on the transfer of shares; and c) it is not permitted to issue shares or debentures to the general public.
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 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 Business 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 with other shareholders. The shares of the Joint Stock Business are listed in the stock exchange, hence, they can easily be purchased or sold through stock exchanges.
A company and its shareholders are considered as two different individuals, and it is established by law; hence only the law can bring it to an end. There won’t be any interruption due to the death, retirement, or 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 to its acts. The law requires every company to have its common seal, and it must be affixed on all 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 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.
Read More: Dormant Company
Benefits of Joint Stock Company
The List of benefits of Joint Stock Company are :
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
Some of the drawbacks of a Joint Stock Company are as follows:
Conflicts of interest
Conflicts of interest are 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 and 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.
Examples of Joint Stock Business
Some of the examples of Joint Stock Business are:
- State Bank Of India
- Tata Motors Limited
- Reliance Industries Limited
Public Company vs Joint Stock Company
- Regulatory supervision: Public companies are subject to stricter regulatory oversight, as they are required to adhere to securities regulations and abide by the rules set by stock exchanges. On the other hand, private joint-stock companies operate within the framework of company laws in their jurisdiction and face comparatively fewer regulatory obligations.
- Investor pool: Public companies typically attract a broader range of investors, including both individual and institutional stakeholders. On the other hand, private joint-stock companies usually have a more limited group of investors, often consisting of individuals closely associated with the company’s founders or management.
- Ability to transfer ownership: Public companies enable the unrestricted trading of shares on the stock market, facilitating convenient ownership transfers. In contrast, private joint-stock companies typically impose limitations on share transfers, often restricting them to specific groups or family members.
- Capital Access: Public Companies has large access to the capital as compared to Joint Stock Company. Joint Stock Companies have limited access of capital.
- Share Trading: Public companies are known for their shares being traded on stock exchanges, making it easy for investors to buy and sell shares in the open market. A joint stock company can have its shares traded on stock exchanges if it chooses to go public. If it remains private, shares are typically not traded on public stock markets and may be subject to restrictions on their transfer.
A joint stock corporation is run by its shareholders, who each own shares that are freely transferable and have a restricted level of liability. A joint stock corporation was legally created that is to say it has received the characteristics of a legal entity. It is therefore a legal entity that abides by all rules and laws.
Similar to the situation of a human being Artificial legal persons have the ability to own property, make contracts, loan money as well as sue other businesses, and many more.
If you planning to start a joint stock company you must seek assistance from OnDemand International professional experts, to help you in joint business structuring. And help you understand all about the laws and regulations of JSC.
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.
Tata Motors Limited
State Bank of India
The term “joint stock” refers to a company that is owned by all of its shareholders
There is at least 1 shareholder, and there is no maximum number
Most non-profits and companies must register the name of their company (operating name) with the Registry of Joint Stock Companies when it’s not your legal address.
It operates its business using the funds that its shareholders have invested. Shares can be freely traded on the secondary market by stockholders. A Board of Directors oversees and manages these corporations. The shareholders choose the board of directors. The Memorandum of Association is modified to adjust the ownership structure.