What’s a joint stock company? Learn this before creating one
Joint stock companies are the largest ones out there and when thinking about powerful companies, proprietorships and partnerships usually don’t pop in one’s head. A joint stock company is a large-scale business which is owned by multiple shareholders. Learn more about it in this article.
Table of contents
- The definition of a joint stock company
- How does a joint stock company work?
- What features joint stock companies have?
- What advantages joint stock companies have?
- What disadvantages joint stock companies have?
The definition of a joint stock company
The easiest way to provide a joint stock company definition: it is a business that is mutually owned by multiple shareholders. All the shareholders involved owning a certain part of the company’s stock. This represents the shares they own in the organization.
How did a joint stock company work?
Any joint stock company involves shares, which are also encountered in public companies. Joint stock companies trade these shares on a registered exchange. The holders can either buy or sell the shares after their own liking. After understanding what is a joint stock company, it is important to mention that the shares in these types of organizations come with obligations.
Compared to ordinary or preferred shares, where there are no obligations involved, joint stock company shares require the holders to vote directly in the company’s management decisions. More than that, the holders can intervene in how the company’s outstanding debts are handled.
What features joint stock companies have?
The artificial legal person
A joint stock company is created by law, which means it received the attribute of an artificial legal person. This makes it a legal entity that respects all laws and regulations. Just as in the case of a normal person, an artificial legal person can own properties, can sign contracts, borrow money, sue other companies and so on. Moreover, the artificial legal person is controlled through a board of directors, which gives it rights. Not all rules and rights apply to artificial legal persons such as joint stock companies though.
The separate legal entity
Compared to a partnership or a proprietorship, joint stock companies have separate legal identities and members. When a company becomes joint stock, it receives a legal identity, as mentioned before. No member of the joint stock company is not liable for it directly. In addition, the joint stock company won’t depend on its members in terms of financial or business activities, as they are led by a board of directors.
Joint stock companies are managed democratically, by the representatives chosen from the shareholders, which form the board of directors.
Maximum number of members
The Companies Act specify that there must be a minimum number of two members to form a joint stock company. The maximum number of members reaches 50. This is a considerable difference considering that for public limited companies the minimum number of members is 7, while the maximum number is not specified.
Incorporating the company
In order to recognize the company as a separate legal entity, the company must be incorporated. Registering a joint stock company transforms it into an artificial legal person. Not registering it means it doesn’t exist legally.
Because joint stock companies are a result of the law, it is normal that they function within the law only. The life of a joint stock company is not related to how long the members are part of it. Even after the death of all members, the company will still exist and can be passed on to others.
The shareholder’s liability
The shareholder’s liability represents the difference between a proprietorship or a partnership and a joint stock company. The assets that belong to the members of the company can’t be liquidated in order to pay the debt of the company. A shareholder’s liability is limited, and the amount of debt has no role here.
The common seal
Because a joint stock company is an artificial legal person, its roles are controlled by the board of directors, which means that the approvals given are common. Common seals are engraved and contain the company’s name, but the decisions are taken by the board of directors. The common seal and the signatures of the directors are the only ones that can bind the company to a document.
The transferability of the shares
All shares are transferable units in the case of a joint stock company. In public companies, people may encounter restrictions when transferring the shares, but the transfers can’t be prohibited in any way.
How is it formed?
The Companies Act 1956 specifies that a joint stock company must be formed by a group of members (promoters). The group of members must respect all the formalities which are prescribed in this act.
What advantages joint stock companies have?
- The main advantage of joint stock companies is that all members have limited liability. Their liability is limited to the unpaid amount of their shares, which is a considerable benefit.
- All shares of a joint stock company are transferable. This means that if a person wants to sell them in the market or in a public listing, they can do it and convert the shares into cash.
- Perpetual succession can be considered a great advantage of joint stock companies, as the shares can be passed on.
- Most joint stock companies are very well managed, considering that all activities are run by a board of directors.
- Joint stock companies have large resources, which means they can hire professionals to run the activities related to them.
What disadvantages joint stock companies have?
- Forming a joint stock company is a very lengthy process that takes a lot of time and resources. The usual period lasts between a few weeks to a few months, it is a costly process and it represents the main disadvantage of such companies.
- The Companies Act require all public companies to make their financial records public. This means that owning a joint stock company involves a major lack of secrecy, as all documents will be public.
- Joint stock companies have to follow a series of strict rules and regulations that reduce its freedom tremendously. The activity of joint stock companies is thus limited.
- The stakeholders in a joint stock company are very numerous and extremely diverse. They range from shareholders to promoters and debenture holders. The diversity often leads to conflicts of interest.
To sum up, a joint stock company is a type of organization where shareholders have the same responsibilities and benefits as a partner. The functioning of a joint stock company is not much different from others, but it offers great privileges for the people who want to join one.