Joint-Stock Company

Frequently referred to as corporations, public companies, or limited companies.

Author: Christopher Haynes
Christopher Haynes
Christopher Haynes
Asset Management | Investment Banking

Chris currently works as an investment associate with Ascension Ventures, a strategic healthcare venture fund that invests on behalf of thirteen of the nation's leading health systems with $88 billion in combined operating revenue. Previously, Chris served as an investment analyst with New Holland Capital, a hedge fund-of-funds asset management firm with $20 billion under management, and as an investment banking analyst in SunTrust Robinson Humphrey's Financial Sponsor Group.

Chris graduated Magna Cum Laude from the University of Florida with a Bachelor of Arts in Economics and earned a Master of Finance (MSF) from the Olin School of Business at Washington University in St. Louis.

Reviewed By: Rohan Arora
Rohan Arora
Rohan Arora
Investment Banking | Private Equity

Mr. Arora is an experienced private equity investment professional, with experience working across multiple markets. Rohan has a focus in particular on consumer and business services transactions and operational growth. Rohan has also worked at Evercore, where he also spent time in private equity advisory.

Rohan holds a BA (Hons., Scholar) in Economics and Management from Oxford University.

Last Updated:December 7, 2023

What Is a Joint-Stock Company?

The third primary legal structure for business ownership is a joint stock company. It is entirely different from a sole proprietorship or partnership in organizational structure.

A company is an artificial entity constituted by law with perpetual succession, limited liability for its members, transferable shares for capital, and a common seal.

It has a separate legal existence from the people who created it. It is capable of suing and being sued in its name. It has a substantial number of members, was organized for business interests, and was created by legislation.

Joint Stock Firms are also frequently referred to as corporations, public companies, or limited companies.

Without the approval of other members, each member's shares may be bought, sold, or transferred. As a result, its capital is split up into transferable shares appropriate for big projects.

The shares represent the proportionate ownership of the Company by each shareholder. As a result, shareholders can sell their shares to third parties without impacting the Company's ability to continue operating.

If a corporation is open to the public, its shares are traded on authorized stock exchanges. Shares of private joint stock companies may be transferred between parties. The agreement and family members nevertheless constrain the transfer.

Management of Joint-Stock Company

Companies are internally managed per their articles of association. The relationship between members and between members and the Company is described in the papers.

Deliberative and decision-making bodies, executive and management bodies, and management control bodies are the three types of management found in a joint stock company.

The Board of Directors is given responsibility for the Company's management. The Chairman-General Manager of the Company, who is typically in charge of the Company's day-to-day operations, must be chosen by the Board of Directors from among its members.

On the advice of the Chairman of the Board/General Manager, the Board of Directors may name an Assistant-General Manager (also known as the General Manager) and define his duties.

The Chairman of the Board will take personal responsibility for and charge of the Assistant General Manager's execution of his responsibilities to ensure that the duties are carried out effectively.

Auditors are appointed for a year and are eligible for reappointment for five years. In addition, at the ordinary annual meeting of the shareholders, auditors are required to present a report on the state of the Company together with the Company's financial statements each year.

Types of Joint-Stock Companies

Limited Companies were created to help businesses succeed because they are less expensive than other companies. As a result, their owners must distribute profits to shareholders in proportion to the number of shares each shareholder owns.

There are three types of limited Companies, namely:

1. Chartered Company

A chartered company was established by the king or other heads of state. Chartered Companies were established before 1844; they are not established today.

These corporations are typically found in monarchy-ruled nations; historically, chartered companies held special rights and benefits because they were established with the aid of a king's authority.

An organization with investors or shareholders that is incorporated and given rights by a royal charter for trade is a chartered company. Chartered companies include the Bank of England, East India Company, and the British South Africa Company charter. 

2. Statutory Company

A specific parliamentary act creates a statutory company. In this case, the act defines all of the power, object, rights, and responsibilities. A specific legislative action established these businesses.

The statute specifies such an entity's authority, duties, and obligations. These businesses are established to conduct important national business.

Examples of statutory companies are the Reserve Bank of India, State Bank of India, Industrial Finance Corporation, and Food Corporation of India.

3. Registered Company 

A registered company is a business established and registered under the country's corporate and securities law with the relevant statutory authorities as a company or corporation.

A registered firm must observe and obey various national regulations, and it is required to submit regular reports to the appropriate government agency regarding the state of the nation.

Registered companies are Microsoft corporation, HSBC holdings, reliance industries Limited, etc.

Joint-Stock Company Characteristics

Professor Haney defines these corporations as "a voluntary association of persons for profit, having the capital divided into some transferable shares, and the ownership of such shares is the condition of membership of the company."

Joint stock companies can have transferable shares, a common seal, limited liability, and separate legal existence. Let's go into more detail about each one.

1. Separate Legal Entity

A company's legal personality is distinct from that of its stockholders. Nevertheless, it has rights and is referred to as an artificial person.

As a result, a shareholder cannot legally bind a corporation by its actions because the Company and its members are seen as separate legal entities under the law.

A business may purchase real estate, take out loans, accrue debt, sign contracts, or even bring legal action against its stockholders. Similarly, shareholders may also take the corporation to court; however, they will not be held liable for the firm's debt.

2. Limited Liability

The maximum amount for which its shareholders are liable is the cost of the shares they have purchased. The shareholders can only be asked to pay the outstanding balance on their shares if the Company incurs significant obligations. Those obligations could be related to capital requirements, debt repayment, etc.

The shareholders will not be held personally accountable for the Company's obligations because it is a different legal entity from theirs, and their personal property will not be taken to satisfy those debts. The corporation may incur debts in its name.

A limited company's stockholders, however, are entirely liable. Members of a corporation limited by guarantee are only responsible for the promised sum.

3. Perpetual Succession

The law gave birth to the corporation, so the law's operation is the only method for the corporation to cease to exist. Therefore, there is no connection between a company's life and the lives of its personnel.

A company's stockholders or members may change over time, but this has no impact on the Company's viability. Death, insanity, or insolvency of its stockholders do not affect the Company's ability to continue operating.

4. Common Seal

A firm cannot sign because it is an artificial person. However, every business is required by law to have a seal with its name etched on it. As a result, a common seal is used to signify corporate acceptance when it joins into a contract or agreement.

All important papers and contracts have the Company's seal attached as a mark of approval. The directors must witness the affixing of the seal.

5. Transferable shares

The shares of the Joint Stock Company are listed on the stock exchange, making it simple to buy or sell them through stock exchanges. In addition, each shareholder will have the right to transfer their shares without consulting other shareholders.

The firm is allowed by its articles of association to limit but not completely prohibit the transfer of shares. Private businesses, however, have more latitude in determining the transferability of shares, thus reducing them to zero.

6. 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 participate in day-to-day activities.

The Board of Directors manages the companies. So the ownership and management are in two different hands. The shareholders do not get any right to participate in company management.

Ownership will remain with the owners, but the board of directors—who the shareholders will choose to serve as their representatives—will exercise control. 

The directors, who are chosen representatives of the shareholders, have the authority to administer the firm's business.

Benefits of a Joint-Stock Company

A type of business that allows for several investors is a joint stock company. Having multiple sources of investment in the industry can help it become more stable and safe.

The shareholders can vote on the Board of Directors' decisions, giving them a voice in how the business is governed. The following are some additional benefits of a company:

1. Large financial resources

A corporation divides its capital into shares that are sold to shareholders. This implies that the amount of money that can be raised has no upper bound.

There are also no restrictions on who can purchase shares in the Company. Any number of people may join a corporation. Therefore, the capital will be divided into many shares with little value.

2. Experienced leadership

Due to many stakeholders with financial stakes, a joint stock company typically hires professionals to run its business.

Shareholders choose the board of directors to serve as their representatives, and most members are seasoned professionals. As a result, the business can make the best use of its specialty.

3. Economies of Scale

The cost benefits that a large corporation enjoys over smaller companies are referred to as economies of scale. The cost per unit will decrease as the production volume increases.

A business gives its stockholder's economies of scale. One of the key advantages is that it can offer a consistent flow of funding for companies with significant investment needs.

4. Tax Benefits

When a company is organized as a joint stock company, the Company's stock shares are not subject to taxation unless and until the shares are sold.

As a consequence, there is less paperwork, and it is much simpler to enter the market because the Company's funds can be spread among a more significant number of investors.

5. Scope for Growth and Expansion

Joint stock firms have the possibility for growth and expansion that other companies do not have. 

Shares in a joint stock company might be purchased with the idea that the Company would grow and produce substantial profits over time. Instead, these businesses are exposed to capable management and leadership, both of which contribute to the success of the Company.

The corporation's board of directors makes decisions regarding the amount of emphasis on growth, which industries to enter, where to invest, etc.

Drawbacks of A Joint-Stock Company

There are numerous stakeholders in a firm, including the shareholders, the promoters, the board of directors, the employees, the debenture holders, etc. Each of these parties has their interests in mind, which frequently creates a conflict of interest.

Despite the many benefits, there are also drawbacks to a joint stock business. Some of the disadvantages include:

1. Difficult to Establish

For many reasons, it might be challenging to establish a joint stock company. One explanation is that numerous people must consent to the Company's formation.

The formation of the corporation is prohibited by even one objection. In addition, numerous legal difficulties must be resolved.

2. Delay in decision making

Sometimes, a firm must make a quick choice to seize an opportunity, but this is impossible in a corporation.

One of the main disadvantages is that since the board of directors takes all critical decisions at annual general meetings, they may miss out on a significant opportunity.

3. More Government Restrictions and regulations

The government places a lot of restrictions on joint stock companies. For example, they can only be established under specific conditions and must comply with several rules and regulations before they can even begin to function.

They are subject to the same regulations as any other business, including restrictions on the amount of foreign investment authorized.

4. Complex procedure

The process of forming a company is time-consuming, expensive, and complex. Numerous legal forms must be completed and submitted to the registrar.

The process for forming a company is instead drawn out; one cannot start a business unless they get both a certificate of incorporation and a certificate to start a business.

5. Lack of Confidentiality

Maintaining confidentiality in a joint stock company is challenging because financial statements, meeting minutes, and different reports to the registrar must all be made public.

Additionally, since the board of directors meets to debate every topic, even staff members may divulge private information, making it impossible to protect trade secrets.

Joint-Stock Company FAQs

Researched and authored by Shriya Chapagain | LinkedIn

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