What is a Joint Stock Company?

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  • 12 Apr 2024
What is a Joint Stock Company? Meaning, Types and Advantages

Key Highlights

  • A joint stock company is a business owned by several individuals.

  • All the shareholders of a joint stock company have voting rights. They can influence the appointment decision for the board of directors.

  • There is a lack of confidentiality as companies must release financial reports regularly.

A joint stock company is an organisation where people pool their capital to form a business with a common goal. This type of company is suitable for large-scale projects where one person cannot afford the entire cost.

The shares represent the ownership of every member. They are usually traded on stock exchanges. However, share transfers in private limited joint stock companies may be governed by an agreement and restricted to family members only.

After looking at the definition of a joint stock company, let’s now understand its features. Here are the important ones.

  • Independent Legal Entity: A joint stock company is an independent legal entity just like its shareholders. It may own property and also file or defend lawsuits. Hence, the joint stock company's members are not accountable to the company.

  • Perpetual Existence: The company continues to exist even if the members change. It can only be dissolved by following due process as per the established laws.

  • Limited Liability: The stockholders' responsibility is restricted in this kind of company. However, members cannot sell their assets to settle a company's debt.

  • Transferable Ownership: Generally, a shareholder may sell his shares without the approval of other shareholders. However, there may be some exceptions due to pre-emptive rights or lock-in periods.

  • Registration: A company must be established to get the status of an independent legal entity. Thus, it is mandatory to register a business as a joint stock company.

There are three types of joint stock companies. They include the following.

  • Chartered Company: A company established by the head of state.

  • Statutory Company: Statutory companies are established by specific parliamentary acts. In this case, the act defines the powers, objectives, rights, and duties.

  • Registered Company: A registered company is established by registering under the business's laws.

The advantages of a joint-stock company are as follows:

  • Large Capital Base: Joint stock companies can issue shares and debentures, raising a large amount of cash. A company can utilise the funds for business expansion.

  • Limited Liability of Members: Shareholders in a limited liability joint stock company are quite safe. The shareholders' personal assets don’t have any impact due to business losses.

  • Share Transferability: Shareholders have no restrictions on selling their shares.

  • Shareholders’ Rights: The shareholders can elect the board of directors.

  • Transparency: A joint stock company must release its financial reports and other critical data.

The following are the drawbacks of a joint stock company :

  • Legal Formalities: Establishing and managing a joint-stock company involves complex legal requirements.

  • Higher Costs: The incorporation and management of the firm require large expenses.

  • Conflict of Interest: There can be disagreements and conflicts of interest among the stakeholders, which include lenders, workers, owners, and the Board of Directors.

  • No Confidentiality: Disclosure of financial reports to the public is mandatory. Hence, there is not enough confidentiality.

  • Double Taxation: Declaring a company's income and dividends makes shareholders liable to double taxation.

Here are the differences between a joint stock company and a public company.

Feature Joint Stock Company Public Company
Ownership Transfer
It may have restrictions, as ownership can be limited to specific groups
Easy transfer of ownership as shares are traded on stock markets
Disclosure
Fewer reporting requirements
Strict reporting requirements
Regulation
Subject to company law but has fewer regulatory obligations
Must follow all the rules of regulators and stock exchanges

Conclusion

Shareholders have a collective ownership in a joint stock company. Over time, joint stock firms have become a good way of business organisation. They can quickly obtain funds and attract new investments. This leads to the growth and innovation of the company. Hence, joint stock firms may continue to influence the business environment in the future. Understand how these companies work and the rules governing them if you’re looking to invest in their stocks.

FAQs on Joint Stock Company

Joint stock companies must have legal documents like articles of association and memorandum of association. These documents are necessary to obtain the status of a legal entity and manage the firm properly.

Joint stock companies need a board of directors to ensure efficient governance and management. The shareholders elect them.

Joint stock companies allow several shareholders to pool their funds. However, there is only one or a small number of people in partnerships or sole proprietorships.

Dividends are paid from the profits in a joint stock company. The amount of dividends paid to shareholders depends on the number of shares they own.

Joint stock companies can be both privately held and publicly traded on stock exchanges. The members have the right to decide whether to list the company on a stock exchange.

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