Joint Stock Company: Definition, Types, Pros & Cons

KEY TAKEAWAYS

• A joint-stock company is a business that’s owned by all of its shareholders in a collective way. The shareholders have the opportunity to sell or buy shares from each other if they want. 
• Joint-stock companies set the foundation for the creation of modern corporations. But, there are a few legal differences that differentiate the two. 
• Incorporating a business limits the liability of shareholders to the initial face value of the shares they own.

What Is a Joint-Stock Company? 

An early form of the contemporary corporation was the joint-stock company. A joint-stock company is a company that’s owned by its stockholders. Each stockholder owns a share according to the number of shares they purchased. 

To finance projects that are too expensive for an individual or even a government to pay, joint-stock firms are established. A joint stock company’s shareholders anticipate receiving a portion of its earnings. It can provide additional opportunities as well as more flexibility. 

Features of a Joint-Stock Company

The specific features of a joint-stock company are going to vary depending on a few characteristics. This type of business structure or ownership model differs compared to other structures. 

Here are some of the different features of a joint-stock company based on individual characteristics.

• Limited liability: With this model, the shareholders are the ones with limited liability. If a business unfortunately suffers substantial losses, the personal wealth that shareholders have is protected. 
• Incorporation: Incorporating can be a lengthy and confusing process to take on. Incorporating is legally compliant with the Joint-Stock Companies Act of 1844. Due to this, there are extensive documentation requirements to become incorporated. 
• Stock transferability: This provides shareholders the opportunity to sell their stocks to new investors if they want to, and they aren’t required to get permission to do so. 
• Separate legal entities: Joint-stock companies have their identity be completely separate and independent of their members. 
• Perpetual succession: The death, retirement, or insolvency of a member isn’t going to impact the continuity of business since joint-stock companies are separate legal entities. 
• Capital acquisition: The joint-stock company can choose to issue more shares and debentures if they see fit, which can help raise additional capital. 
• Number of members: There isn’t a limit to the number of members that can be part of a joint-stock company, but there must be a minimum of one. 

Types of Joint-Stock Companies 

The types of joint-stock companies depend on a few different sets of criteria. For example, the types can vary based on incorporation, liability, the number of members, and ownership. 

Types of Joint-Stock Companies Based on Incorporation 

• Registered Company: A registered company is any firm that has been incorporated under the Companies Act in the specific state where it’s located. 
• Chartered Company: A chartered company gets incorporated under the royal charter. It gets signed by the state where it is formed and these types of companies often receive privileges when it comes to executing commercial business operations. A perfect example of this is the East India Company. 
• Statutory Company: A statutory company is one that the Parliament has granted specific legal status. These businesses support the provision of public services and amenities. The act outlines the company’s goals, rights, and legal authority.

Types of Joint-Stock Companies Based on Liability 

• Private Company: A private limited company satisfies the following three requirements: 1) it has a certain number of members, as determined by the applicable Companies Act; 2) it restricts the power to transfer shares, and 3) it is not permitted to issue shares or debentures to the public. 
• Public Company: A publicly traded corporation can have as many members as it wants, in most cases. Shares of the corporation may be bought and sold at any time. These businesses can also publicize the issuance of shares or debentures.

Types of Joint-Stock Companies Based on the Number of Members

• Unlimited Liability Company: In a business like this, stockholders are liable for their own assets and personal property. 
• Limited Liability Company: The most typical type of company for business ownership is a limited liability company. The liability is capped at the value of the shares that the owners own. 
• Company Limited by Guarantee: In the case of liquidation, the shareholders are required to pay a set sum. The Memorandum of Association contains information about the actual amount that needs to get paid. 

Types of Joint-Stock companies Based on Ownership 

• Government Company: A company in which the federal, state, local, or a combination of federal, state, and local governments hold at least 51% of the shares. 
• Non-Government Company: In this type of company, most of the stake is owned by a private institution or private individuals.

Advantages of a Joint-Stock Company 

There can be many advantages that a joint-stock company can provide. Here are some of the biggest ones to keep in mind if you’re looking into starting a joint-stock company. 

• Limited Liability of Members: When members have limited liability it means they’re protected should something happen. For example, substantial business losses won’t impact the personal property or assets of a shareholder. 
• Share Transferability: Shareholders have the option to sell their shares to another investor if they want to and there are no restrictions to this. 
• Transparency: Joint-stock companies disclose all of their financial records and financial statements to the public, establishing a high level of transparency. 
• Shareholder’s Rights: Shareholders can have a say in the decision-making of the company and they also have the right to elect the Board of Directors. 
• Capital Accumulation: This is when the company issues additional shares and debentures to help raise more capital. The newly acquired funds can then be used for various business operations or expansions. 

Disadvantages of a Joint-Stock Company

While a joint-stock company can bring a wide range of benefits, there are still a few disadvantages worth highlighting. Here are some of the most common disadvantages to a joint-stock company. 

• Excessive Legal Formalities: There are extensive legal formalities involved in the formation and management of a joint-stock company. 
• Costly — The administration and formation costs are fairly significant. 
• Conflict of Interest: The stakeholders may disagree and have conflicts of interest (owners, employees, the Board of Directors, lenders, etc.). 
• No Confidentiality: Financial reports must be publicly disclosed and there’s a lack of discretion.
• Double taxation: Shareholders are liable to double taxation because the company’s income and dividends (when declared) are taxed.

Joint Stock Company Example

Let’s say that Company X wants to raise additional capital to help fund future business expansion. To help with this, the company decides to issue an additional 1,000 shares to the public. Each share is valued at $10 and also includes a $5 share premium per share. 

To calculate how much capital the company has raised, the calculations would look like this:

Face value of the shares = $10

Share premium price = $5

Number of new shares issued = 1,000

From here, the issue price would be $15. Now, you just need to multiply the issue price by the number of new shares issued. It would look like this:

10 + 5 = 15 

15 x 1,000 = $15,000

Therefore, Company X would have raised $15,000 worth of additional capital to help fund future projects.

Summary

A joint-stock corporation is one that is held by its stockholders, with each stockholder owning a certain number of shares, or “joint-stocks,” of the company. Joint-stock companies are created to finance projects that are too expensive for an individual or even a government to pay for. 

The stockholders of a joint stock business expect to receive a piece of its profits. Both greater opportunities and flexibility may be offered by it. The specific features of a joint-stock company are going to depend on the structure. 

For example, it can depend on whether or not the company is incorporated, its liability, the number of members it has, and the type of ownership.