A Joint Stock Company (JSC) is a primary vehicle for business in the contemporary marketplace and is a powerful vehicle for raising significant capital and for managing complex business enterprises. It has been at the core of economic history and offers a great deal of certainty, limited liability, and opportunities for both stakeholders and entrepreneurs alike.
What is a Joint Stock Company?
A Joint Stock Company is a voluntary association of individuals that is profit-motivated, with capital that's divided among transferable shares, and the ownership of shares establishes membership. Importantly, it is an artificial person created by law, as it is a distinct legal entity that stands apart from its membership (shareholders).
Put simply, a Joint Stock Company is a corporation for which ownership is shared by multiple shareholders or investors with shares in the company’s stock. Each shareholder owns a share of the company that is proportional to the number of shares in its stock. Unlike a sole proprietorship or a general or limited partnership, a JSC must be incorporated under the relevant country’s corporate legislation (e.g., Companies Act in India) to obtain legal status.
For investors wishing to be a part of the growth of such large organizations, it is important to understand the fundamentals of how these companies raise capital, which is closely related to general Equity Market Basics.
Features of a Joint Stock Company
A Joint Stock Company's structure is established by a few distinct and important characteristics:
1. Separate Legal Entity
A JSC is a separate legal entity from its shareholders. It can own property, enter into contracts, open a bank account, sue and be sued in its own name. This entity's separations mean that the company’s existence is independent of its members.
2. Perpetual Succession
The lifespan of a Joint Stock Company is perpetual and uninterrupted. The company is created by law, and may only be terminated by law. The death, bankruptcy, transfer of shares, or withdrawal of any or all of its owners shall have no effect on the existence of the company.
3. Limited Liability
This is one of the most appealing features for an investor. A shareholder’s liability is limited to the face value of their shares or the amount unpaid on their shares. Their personal property is protected from any liabilities of the company, significantly reducing the risk of investment.
4. Transferability of Shares
In a public joint-stock company, shares may be freely transferred. A shareholder is allowed to effect the sale or purchase of shares on a stock exchange without the approval of any other members. This is a benefit to investors for the purpose of liquidity.
5. Common Seal
Whether a joint-stock company is an artificial person cannot sign documents. Consequently, a common seal acts as the signature for all of the important documents and contracts for the joint-stock company.
6. Separation of Ownership and Management
As there are often many owners (shareholders) of a joint-stock company who are located in different parts of a country, it would be unreasonable for shareholders to be involved with the day-to-day management of the company. Instead, they would elect a board of directors to carry out the management of the company, representing them. This distinction creates professional management.
For a detailed exploration into the management body of a company, and regarding a company's financial condition, refer to a detailed review on our blog, How to Analyze a Company’s Balance Sheet.
Advantages of a Joint Stock Company
The structure of a Joint Stock Company offers the advantages that allow it to be a large-scale enterprise.
The main avenue of a Joint Stock Company to raise significant capital through the issuance of shares to the public is a foundational concept in finance. To elaborate regarding the acquisition of knowledge market information and how data analysis affects your investment decisions, please refer to the complete course of Data Analysis for Trading in Shares Market.
Disadvantages of a Joint Stock Company
While the Joint Stock Company structure has numerous positive attributes, it does have some weaknesses as well:
1. Complex Formation and High Operating Cost
The process of forming a Joint Stock Company is convoluted, time-consuming, and requires a lot of legal formalities, documentation (like the Memorandum of Association and Articles of Association), and compliance with otherwise accepted laws and strict regulations. The ongoing costs of audit, report, and statutory compliance are also significantly high.
2. Lack of Secrecy
Private or public Joint Stock Companies are required to state full financial reports and disclose public information about the company operations to the public, the government, and the shareholders. This transparency of the company business does not mean there is any privacy of the business operations, and may aid in the situations of Private and public Joint Stock Companies in a competitive market.
3. Excessive Government Regulation
Almost every Joint Stock Company is regulated by the government (SEBI in India) to protect public interest. The compliance with several acts and laws makes day-to-day operations fixed, less flexible, and potentially less free, as well as leading to more bureaucracy.
4. Delay in Decision-Making
Decisions may also often need discussion with several levels of management, board meetings, and possibly decision-making shareholders. This bureaucratic structure can lead to delay and time it may take to make decisions that could be very critical to the organization, instead of being a timely and nimble business in responding to the changing market.
5. Conflict of Interests (Agency Problem)
The division of ownership from management creates the 'agency problem', where top managers (agents) may pursue personal objectives that could run counter to the long-term interests of the shareholders (owners) by, for example, emphasizing short-term profitability over long-term sustainable growth.
Studies of the regulatory environment are important, and anyone interested in a regulatory perspective of the financial markets could take the Securities Operations and Risk Management NISM Series VII Cert course.
Types of Joint Stock Companies
Joint Stock Companies are mainly divided into two classes, depending on whether there are shares that are restricted as to who they can be transferred to and who can subscribe to their capital:
1. Private Limited Company
Shares: Restricts the right to transfer its shares.
Public Subscription: Prohibits any invitation to the public to subscribe for its shares or debentures.
Members: Usually, a Limited Company must have a minimum of two members and a maximum number of non-employee members (often 200).
Disclosure: A Limited company is subject to fewer legal and regulatory formalities than a public one.
2. Public Limited Company
Shares: Shares can be transferred freely.
Public Subscription: Can offer the general public the ability to subscribe to its shares and debentures, which usually happens in an Initial Public Offering (IPO). This is how companies check IPO Allotment status online for the new shares.
Members: It is required to have at least seven members, with no maximum limit of shareholders.
Listing: Its shares are often listed (and traded) in a stock exchange, and, therefore, will be subject to strict regulations from organizations like SEBI.
JSCs can also be classified broadly based on the way they were formed, such as Chartered Companies (formed under a special charter from the Head of State) and Statutory Companies (formed by a special Act of Parliament). Registered Company (that is, a company formed by registration under the Companies Act) is the most common form existing today.
Conclusion
The Joint Stock Company is a strong and important type of business organization that provides a framework for massive production and provides for a large accumulation of capital and risk sharing. Joint Stock Companies also have unique features such as limited liability, a perpetual existence, and ease of capital raising, which make them the most common form of the modern corporation around the world.
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