What is the definition of a joint stock company?
A joint stock company is a form of organization where investors or shareholders with a common purpose pool their funds to form a company. This type of company is usually suitable for large scale operations where the capital requirement is huge and beyond the capacity of a single person. The share of every member or owner of the joint stock company is defined and usually displayed as a share. These shares are transferable in nature and traded on registered stock exchanges. In the case of private limited companies, the shares can be transferred based on an agreement and limited to family members. The shareholders or the investors of the company have direct voting rights and a bigger say in the major decisions of the company.
Features of Joint stock company
Joint stock companies are defined in the Companies Act, 1956 as an artificial person having a separate legal identity. Some of the key features of a joint stock company are detailed below.
a. Artificial person
As mentioned above, a joint stock company is in the nature of an artificial person that is created in the eyes of the law. Such a company uses a separate name and company seal as its signature. It is a legal entity that can enter into contracts with a third party and such contracts are legally binding when authorized by the Board using the Company Seal. It is also important to register the company as per the provisions of the Companies Act 1956 failing which without incorporation, the company cannot come into existence.
b. Limited liability
The shareholders of the joint stock companies have limited liability. Their liability is limited to the extent of their share in the company and the unpaid or outstanding amount of shares held by them. This limits their exposure to the debts of the company.
c. Perpetual existence
A joint stock company is perpetual in existence. This implies that the only way for a joint stock company to cease into existence is by a function of law. The company is not affected by the death, insolvency, or transfer of shares to other members.
The ownership of the joint stock company is divided into defined shares and the ownership of such shares is the pre-condition for such membership. The shares of the public company can be transferred to any person however, the same is not possible with private companies as the shares can be transferred only with an agreement and permission of the existing members. Such shares are usually kept within the family.
e. Number of members
The provisions of the Companies Act define the number of persons needed to start a public company or a private company. In the case of a public company, the minimum number of members to start a company is 7 while there is no restriction on the maximum number of members. For a private limited company, the minimum number of members needed is two and the maximum number of members allowed is 50.
f. Common seal
A joint stock company is an artificial person and its day-to-day functions are managed by the Board of Directors. All the decisions taken by the Board have to be authorized with the company’s common seal that has the name of the company and the signature of the authorized personnel.
g. Separate management and ownership
An important feature of joint stock companies is the clear distinction between the ownership and the management of the company. The owners of such companies are usually large and scattered with limited shares to their name which makes it difficult for them to handle the daily affairs of the company. Hence, these functions are delegated to competent managerial personnel who act as the representatives of the owners who are responsible for the day-to-day management of the company.
Advantages of Joint stock company
Some of the key advantages of a joint stock company are highlighted hereunder.
a. Benefit of large capital
The top companies in the world are the companies that have huge capital requirements and a dynamic business model. Such businesses can raise the required capital easily through public funds and the funds received from investors.
b. Economies of scale
Another important benefit of joint stock companies is the scale of operations. Such large-scale operations reduce the overall cost of the company and also help in utilizing the resources efficiently.
c. Stable existence of the company
A joint stock company has a separate legal entity and a perpetual existence. This provides stability to the business in the eyes of the public. This creates better opportunities for the company and helps in boosting the continual growth of the business.
d. Tax benefits
Corporate tax is one of the main pillars of the taxation system in our country. The Income Tax Act provides many tax benefits for corporations that help in reducing tax liability and also provides many incentives in the form of subsidies, deductions, or exemptions.
e. Increased investment in business
Joint stock companies are regulated by the provisions of the Companies Act, 1956. The management of the company is held accountable for any wrongdoings or misrepresentations and has to report them to the shareholders and owners of the company. This increases the confidence of the public and the investors in the company as they are assured of their investment.
Limitations of Joint stock company
a. Lack of secrecy
The company is required to maintain detailed records of all its transactions which are regularly audited by internal and external auditors of the company and reported to the owners and investors. This makes it difficult for the management or the employees to keep any secret or fool the investors.
b. Excessive legality in the formation of the company
The registration and incorporation of a company are mandatory for it to come into existence. These require extensive legal compliances to be adhered to by the promoters and the management of the company. Apart from the initial stage of forming a company, it is also required to follow the set guidelines for preparing and reporting its financial statements. Such legal compliances can be tedious and pose a hurdle in the day-to-day functioning of the company affairs.
c. Lack of interest on part of the shareholders
Shareholders of the company are not responsible for its management. They are the owners but their liability is limited to the extent of the unpaid amount of their shares. Most shareholders are only concerned with the dividend income and the capital gains on their investments. Hence, a lack of interest on part of the shareholders can also make the management least interested in their duties towards the company.
d. Excessive Government control
Joint stock companies require a lot of capital and the investment is sought from individual shareholders that are scattered all over the country and also abroad. This requires excessive government control and set rules and regulations to safeguard the owner’s and investor’s interests. Also, India is yet to achieve the ultimate ease of business which is a key for the smooth operations of the company. There are many bureaucratic hurdles and legal compliances (as mentioned above) that deter most entrepreneurs from starting a new company.
e. Delayed decision making
The management of the company is for all purposes mere representatives of the owners (shareholders) of the company. Therefore, any major decision of the company can be taken only after following the due approvals in the Board meeting or the AGM. This often results in unnecessary delays in the decision-making process.
f. Incapable management
The management of a company has to be quite capable of handling the complex operations of the business as well as meeting the ultimate goal of increasing the bottom line thereby the wealth of the owners. If the management of the company is not capable it can result in dire consequences even to the point of winding up of the company. Hence, it is important that the management of the company has to be competent and well-experienced to handle the company affairs.
g. Excessive control of the Board
The Board of Directors of the company is responsible for its daily functions and its profitability. The Companies Act has conferred many powers in the hands of the Board which may lead to their misuse to satisfy their personal goals. Moreover, a lack of interest of the shareholders can also lead to an unchecked Board which is not in the best interest of the company.
Joint stock companies are the dominant companies in every sector of an economy. They are important at the micro (shareholder’s interest) as well as the macro level (country’s economy). Hence, it is important that these companies are well-regulated and at the same time have enough space to grow resulting in increased shareholder wealth and ultimately the wealth of the nation.
The different types of joint stock companies are,
-Statutory Company (a company formed under a Parliament Act with clearly defined power, scope, responsibilities, etc.)
-Registered Company (a company formed and registered under the company law)
-Chartered Company (a company formed and incorporated by the King or the Head of the State)
The mandatory documents needed while registering and incorporating a company are,
-Memorandum of Association
-Articles of Association
A private limited company can have a maximum of 50 members.
The social benefits of a joint stock company are,
-Employment opportunities especially in the backward areas
-Benefit from economies of scale
-Addition to the direct taxes
-Earning foreign exchange through exports