The activity of producing goods or rendering services in exchange for money is the idea of running a business. There are different forms for setting up business organisations, like – sole proprietorship firms, partnership firms, trusts, companies, etc.
While setting up businesses as sole proprietorship and partnership firms are easy, their main drawbacks are limited capital and unlimited liability. Learn to invest with a small budget.
This article talks about a form of business that overcomes the limitations of others.
What is a joint stock company?
Definition of a joint stock company: Professor Haney defines it as “a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.”
Meaning of joint stock company: As the definition suggests, it is a form of organisation where individual investors pool money to run the business in exchange for a part ownership.
These investors hold ownership in the form of shares that can be traded in the secondary market, at their will.
A few examples of joint stock companies in India are Tata Consultancy Services, State Bank of India and Reliance Industries Ltd.
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Features of joint stock companies
The unique characteristics of a joint stock company are what distinguishes it from other forms of business. Joint stock companies are registered and governed by the Companies Act, 2013.
- Separate entity – One of the significant features of a joint stock company is its distinct legal status. While sole proprietor and partnership firms see the business and its owner as the same, the joint stock company sees the owner and the business as separate entities with different legal statuses.
- Limited liability – Since the owner and business are different entities, the owner’s liability is limited. The owner does not bear the entire liability of the business but takes responsibility only to the extent of shareholding.
- Common seal – This goes back to the company having its own status. Since owners are only representatives of the company and not the company themselves, they cannot sign on behalf of the company. The company must have a seal in its own name to be used on formal documents.
- Share transfers – The shareholders of a joint stock company have the liberty to trade their shares to other individuals without any specific consent from the other owners.
- Perpetual – The river is used as a metaphor to describe this feature. The Brook is a poem about the river that says, “Men may come and men may go, but I go on forever.” Similarly, the company’s shareholders may change, but the company’s existence will go on until it is legally liquidated.
Types of joint stock companies
- Registered company – A company set up under the Companies Act in India, fulfilling all the legal requirements of the act, is called a registered company.
A registered company can either be a private or a public limited.
A private limited company is where the public does not have access to shares. It should have two members at least and 200 members at the maximum.
A public limited is a large-sized company where shares are offered to the public to raise capital. A public company has no rule on the upper limit of members, but it requires at least seven members to start the business.
- Chartered company – A company formed and governed under special charters is called a chartered company. A charter is a written agreement by an authority (Eg: Government), that grants permission to start a company. The charter also lays the set of rules that the company has to follow.
These companies have unique advantages as compared to regular companies.
Example: The East India Company established under the Charter Act 1813.
- Statutory company – A company formed under a specific act of the parliament to handle particular government projects is called a statutory company.
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Benefits and importance of joint stock companies
- Public companies, upon fulfilling certain requirements, have the authority to list their shares and offer them to the public. The companies get access to large-scale capital, which helps them in running large-scale businesses.
- Sizeable capital helps to establish companies with increased production capacity, helping them achieve cost advantages.
- The responsibility of shareholders is bound by the extent of shareholding. This means that the personal properties of shareholders are not related to the business, unlike the case in sole proprietor and partnership firms.
- Investors have the freedom to trade their shares in the stock market and earn profits on their investments. Joint stock companies also provide transparency to their investors by publishing their financial statements to the public.
Limitations
- Starting a joint stock company involves a lot of legal formalities. So, this requires a company to fulfil multiple eligibility criteria, making the registration process lengthy. The registration of companies is also considered a costly affair.
- Since joint stock companies, especially public limited companies, have numerous shareholders, the possibility of conflicts and disputes is high.
- The Companies Act requires all public companies to disclose their financial statements. While this is an advantage to the investors, it is a disadvantage for the management as there is no secrecy and confidentiality.
Difference between partnership and joint stock companies
| Partnership firms | Joint stock companies |
| Governed under the Indian Partnership Act of 1932. | Governed by the Companies Act of 2013. |
| The owners of the partnership firms are called partners. | The owners are shareholders. They may appoint representatives to manage the business. |
| The partners and the business are classified as a single entity. | The shareholders and the business are distinct legal entities. |
| There is a binding on the personal assets of partners i.e., the liability of partners is unlimited, except in the case of limited liability partnerships. | The extent of shareholding determines the liability of shareholders. |
Bottomline
Joint stock companies are among the most significant structures of business in India. Despite having stringent procedures, they are popular owing to the vast benefits of raising capital and limited liabilities.
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The vast size of operations and revenues of companies have a crucial impact on the country concerning various economic factors like growth rate, GDP and employment.
From the investor’s perspective, joint stock companies have been a great source of investments and additional income.
