Joint Stock Company Explained

There exist various types of business organizations that differ from each other by their capital requirements, control, nature of liability, stability, etc. Some of the forms of business include sole proprietorship, partnership, co-operative societies, company, etc.

The sole proprietorship and partnership forms have some serious limitations when it comes to financial requirements, professional management, and liability. A business form that overcomes these problems to an extent is a joint-stock company.

This article highlights the meaning of a joint-stock company, a joint-stock company vs. a public company, and the benefits of a joint-stock company.

What is a Joint-Stock company?

A joint-stock company is a business organization jointly owned by the company’s stockholders. The ownership percentage of each shareholder depends on the number of shares they hold. In a public joint-stock company, the stocks are traded on the stock exchanges.

The members of the company can join and exit it voluntarily. Even if the members sell the shares to other investors, the company continues to exist with the current shareholders as its owner. Therefore, the company’s life does not depend on any members.

The current shareholders enjoy the gains or bear the losses of a joint-stock company in proportion to the number of shares they hold. However, ownership and management are two different parts of such a business form.

When all the shareholders are considered the company’s owners, the management is in the hands of a few members, who act as representatives, elected by the shareholders. The common seal of the company works as a signature for documents and matters where the company’s approval is needed.

Historically, joint-stock companies’ members tend to have unlimited liability. Though, after its incorporation, members possess limited liability. The company acts as a separate legal entity, with a different identity from its owners.

Some examples of Joint-stock companies in India are Reliance Industries Limited, State Bank of India, Oil and Natural Gas Limited, Indian Oil Corporation, and so on.

Joint-Stock Company Vs. Public Company

The rules and regulations applicable to joint-stock companies differ in each country. In some countries, such as the United Kingdom, joint-stock companies with unlimited liability exist. However, in most countries, joint-stock companies are structured with limited liability. On the other hand, the shareholders of public companies always have limited liability.

One of the types of joint-stock companies that exist in some countries is private joint-stock companies. In private joint-stock companies, there are restrictions on the transferability of ownership, but not in public companies. In some countries, the joint-stock company is considered a synonym for a public company.

Benefits of Joint-Stock Companies

The benefits of joint-stock companies are as follows.

For the company:

• Access to a huge capital: The companies often require funds for financing their day-to-day operations, research & development, capital expenditures, mergers/acquisitions, and so on. The joint-stock form inherently has access to huge financial resources because of more members. Though it does not mean that members need to invest a big amount. They can invest small amounts, too. However, the aggregate capital available to the company is larger.
• Economies of scale: The joint-stock company can leverage the huge capital to increase production capacity. Increased production capacity helps the company to bring down the overall cost. The company can utilize its resources more efficiently. It can push the company’s earnings and return for shareholders.

For the investors

• Transparency: All the members of the joint-stock companies are owners, though they are not involved in the day-to-day management. To ensure that existing and potential investors have enough information about the company, the joint-stock companies need to publish their annual reports to the public. It assures transparency.
• Limited liability: Another benefit of the joint-stock company is the limited liability of members. In a limited liability joint-stock company, the members of the companies are liable for the debt obligation of the company to an extent of the face value of their shares. The members and the joint-stock company are deemed to have separate legal existences. The personal assets of the member remain untouched in the instance of company default.
• Easy transferability of ownership: If the existing investors want to exit their investment, they can sell off the stock of the joint-stock company to another investor(s). Once the investor sells the stocks, the ownership would be transferred to the buyer/buyers. There are no strict restrictions on ownership transferability.

To conclude, the joint-stock company is a business form that the stockholders of the company jointly own. The business structure is similar to a public company, where ownership is easily transferable. However, the formation and administration of a joint-stock company take a considerable amount of time and money. Fortunately, new stock trading apps are emerging that offer faster and more affordable alternatives to traditional investment structures. Moreover, the conflict of interest is one of the biggest limitations associated with such a business form, as managers and owners are different.