Picture yourself in the 1600s, where the East India Company was making waves. But they didn’t just trade. The set up the base for the modern business โ the joint stock company. This new way of doing business shook up the world and influenced global trade. But what is a joint stock company?
In this blog, letโs understand the concept of joint stock companies, key features of joint stock company and more.
What is a Joint Stock Company?
A joint stock company is a type of business organisation where ownership is split into shares. Individuals can buy and sell these shares freely as this arrangement helps the company collect more funds as many individuals are contributing to invest in it. With this extra cash, the company can take on big projects and run its day-to-day operations smoothly.
If you own shares in the company, you are only responsible for the value of those shares. So, if the company faces problems, your personal belongings stay safe. In this kind of company, you can easily buy or sell your shares whenever at your convenience.
characteristic of a joint stock company.
Key Features of Joint Stock Company
A joint stock company, as defined by the Companies Act of 1956, is an artificial legal entity. It has distinct features:
- Artificial Entity
Joint stock companies are legal entities with their own names and seals, allowing them to enter into contracts. Exercising proper registration is vital for their existence.
- Limited Liability
Shareholders in such companies are not personally liable for the company’s debts; their responsibility is limited to their share ownership.
- Perpetual Existence
These companies exist indefinitely, unaffected by changes in ownership.
- Transferability
Ownership shares can be bought and sold. For instance, in public companies, shares can be transferred to anyone providing flexibility in ownership.
- Common Seal
All Board decisions require authorisation with the company’s common seal.
These features make joint stock companies a flexible and widely used business structure.
Types of Joint Stock Company
Below, you’ll find a brief explanation for the three different types of joint-stock companies:
- Registered Company
A registered company is a joint stock company that follows all the legal rules and paperwork required by the government.
It’s officially recognised by the government and has to obey the rules of the place where it operates.
For example, think of Reliance Industries Ltd, a company officially recognized by the Indian government, which is required to comply with the government’s rules in the places it operates.
- Chartered Company
A chartered company is a joint stock company that gets special privileges or rights from the government.
These rights allow them to work in certain industries or areas with exclusive rights.
An excellent example is the Oil and Natural Gas Corporation Ltd., which holds the largest share in India’s oil and natural gas industry.
- Statutory Company
A statutory company is a joint stock company created by a special law passed by the government. They have to follow the rules and duties set by that law.
For instance, a special law from the Indian government brought the Life Insurance Corporation of India into existence.
Advantages of Joint-Stock Company
Let’s explore some of the advantages of joint-stock companies:
- Joint-stock companies can access substantial capital by issuing shares to numerous investors, facilitating significant investments for growth, expansion, and strategic initiatives.
- Shareholders in joint stock companies benefit from limited liability, protecting their personal assets from the company’s debts and obligations, making it a safer investment option.
- Investing in multiple joint stock companies allows investors to diversify their portfolios, reducing risk exposure to the performance of any single business, and enhancing stability in volatile markets.
Disadvantages of Joint-Stock Company
With an understanding of some advantages in mind, it’s time to examine the disadvantages of this type of company:
- Joint stock companies are subject to extensive legal and regulatory requirements. This includes the need to file financial reports, hold annual meetings, and comply with various corporate governance rules. This can be time-consuming and expensive.
- Shareholders in a joint stock company may have limited control over the company’s operations and decisions. Large institutional investors or majority shareholders can often dictate the direction of the company, leaving smaller shareholders with little say.
- When a joint stock company issues new shares to raise capital, it can lead to the dilution of ownership for existing shareholders. This means that each existing shareholder’s percentage ownership in the company decreases.
Conclusion
In summary, think of a Joint Stock Company as a gathering where people, no matter how much cash they have, come together to share profits and reduce risks in proportion to their ownership in the company. It’s a flexible way to operate a business.
Yet, it comes with some complex rules, and smaller investors might not have a big voice. Still, the idea of everyone pitching in for a common goal is quite appealing and provides advantages to both investors and companies.
FAQs
Yes, they are subject to various legal and regulatory requirements, including financial reporting and corporate governance rules.
Private Joint Stock Companies have limited shareholders and their shares are not traded publicly. Public Joint Stock Companies have many shareholders and their shares are traded on stock exchanges.
Shares can be passed on to your heirs or beneficiaries according to your will or the laws of inheritance in your country.
Yes, like any other business, a joint stock company can face financial difficulties and potentially go bankrupt.
Investing in a joint stock company provides the opportunity for increased returns and greater liquidity, primarily because of the ease of buying and selling shares.
