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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 is easy, their main drawbacks are limited capital and unlimited liability.
This article talks about a form of business that overcomes the limitations of others.
What is a joint stock company?
A joint stock company is a form of organisation where individual investors pool money to run the business in exchange for 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.
Features of joint stock companies
- Separate entity – The joint stock company sees the owner and the business as separate entities with different legal statuses.
- Limited liability – The owner does not bear the entire liability of the business but takes responsibility only to the extent of shareholding.
- Common seal – Since owners are only representatives of the company and cannot sign on behalf of it. 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 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. Public companies may have any number of members, but they must have seven to start.
- 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 and set the rules.
- Statutory company – A company formed under a specific act of the parliament to handle particular government projects is called a statutory company.
Benefits of joint stock companies
- Public companies may list and sell shares after fulfilling certain conditions. The companies receive large-scale funding for running large enterprises.
- Large amounts of capital help companies boost production capacity and reduce costs.
- Shareholders are responsible for their holdings. This implies stockholders’ personal holdings are unrelated to the company, unlike sole proprietorship and partnership organisations.
- Investors may trade stocks and profit. Public financial statements from joint stock companies provide investors with transparency.
Limitations
- Opening a joint stock corporation requires several legal steps.
- Conflicts and disputes are common in joint stock companies, particularly public limited companies, with many shareholders.
- All public companies must report their accounting records under the Companies Act. This is good for investors but problematic for management since there is no secrecy.
Differences 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. |
| 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.
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.
FAQs
Joint-stock companies were established in order to provide funding for activities that were too costly for an individual or even for the government to sustain financially. In a joint-stock company, the owners expect to get a portion of the company’s earnings.
Several of the major colonialist and imperialist businesses of the eighteenth century were joint-stock companies. The English East India Company, the Dutch West India Company, and the Dutch East India Company are a few examples.
Legal Documents for a joint stock company are listed below:
A copy of the Articles of Association
Amended Articles of Association (if required)
Initiators’ details
Consent forms from directors
Qualifying Stock Agreement
Description of the company’s capital structure
There are four phases involved in the formation of a joint stock company:
Promotion Stage
Incorporation Stage
Raising of capital Stage
Business Commencement Stage
The joint stock company must be formed by a public deed that clearly states the contract parties.
Both short and long term funds, including owned funds like equity shares, preference shares, and retained earnings, can be used as a source of capital. On the other hand, borrowed funds can also be used as a source of capital for a joint stock company.