Joint stock company is a type of incorporated business entity, where the members share the ownership and profits of the company. They have limited liability and enjoy the freedom from personal financial obligations should the company face a setback. This makes it attractive for large-scale investments because of the greater capacity to raise funds. The concept of shareholding has been the backbone of the global economy for many years and has enabled new and ambitious businesses to raise the funds they need to fuel their growth.
In a joint stock company, the members or shareholders own the company’s assets and liabilities is divided among them. A company is formed by registering it with the relevant authorities, costing in the range of thousands or tens of thousands of dollars. This is known as ‘incorporation’. The company is then authorised to issue shares to the public.
The shareholders can be divided into two categories, the majority shareholders, and the minority shareholders. The majority shareholders determine the dynamics of the company and its decision-making, however, minority shareholders can still influence the company by exercising their voting rights in the Annual General Meeting. The shares are also priced according to the ownership and profits of the company, with majority shareholders getting a higher dividend rate than minority shareholders.
A joint stock company can issue new shares when necessary. This is known as ‘issue of new shares’. This helps the company raise funds for various purposes including working capital, expansion of business, acquisition of new technology, etc. The capital raised can be used for all the requirements of the company.
The company can be managed in two ways, either by a sole proprietor or as a company with a Board of Directors. A sole proprietor takes sole responsibility for the management and running of the business. On the other hand, when it’s incorporated, the board of directors consists of the shareholders who then make all the decisions regarding the company’s operations, such as pricing and products. The board is elected by the shareholders, and they have the power to appoint the CEO and other executive members.
A Joint Stock Company is also required to comply with applicable laws and regulations. These include filing annual returns and accounts, declaring dividends, and appointing auditors. Additionally, the company must hold Annual General Meetings (AGMs) where shareholders meet and vote on matters. It is also mandated to issue and manage stockholders’ agreements, which outline the shareholders’ rights and restrictions.
In conclusion, joint stock companies offer a great way to share the ownership and profits of a business with limited liability for the shareholders. All legal requirements must still be followed to ensure the smooth operation of the business. Joint stock companies offer the opportunity for raising funds and expanding the business, but it’s important to note that the majority shareholders have greater ownership and control over the company’s decisions.
Advantages of Joint Stock Companies
The main advantage of a joint stock company is its limited liability status, which protects shareholders from personal financial obligations in the event that the company fails or is sued. Additionally, joint stock companies have much higher capacity to raise funds, which makes them ideal for ambitious companies that need capital and resources to grow. Furthermore, it is easier to transfer ownership and shares of a company through joint stock companies, as opposed to sole trader individual business entities.
The structure of a joint stock company also offers significant advantages to investors and shareholders. The shares in a joint stock company can be bought and sold, so investors can make profits from the company’s profits as well as from the growth of the business. Furthermore, the majority shareholders have more control and influence over the direction of the company, which means that the decisions taken are more likely to be beneficial to the majority shareholders.
Joint stock companies offer greater flexibility to its members in terms of decision-making, the introduction of new products and services, and the formation of strategic partnerships. The shareholders of the company can also be involved in key decisions that affect the business, since majority shareholders have the power to approve or disagree with the decisions taken by the board.
In addition, joint stock companies have access to better financial services. Banks tend to have more confidence in joint stock companies than in other businesses as they can guarantee their assets. This gives banks more freedom to provide loans, including mortgages, or other types of financial services.
Risks of Joint Stock Companies
All investments come with risks, and joint stock companies are not exempt. One of the main risks of joint stock companies is that if the company has financial difficulties, the shareholders may still be responsible for any debt owed to creditors. Furthermore, the shareholders can be personally liable for any fines and penalties imposed on the company as a result of misconduct or negligence.
The risk of ownership is also real in joint stock companies. The majority shareholders have the power to make decisions that are beneficial to them over the minority shareholders. This could lead to significant imbalance and lack of protection of the minority shareholders rights. Even if the minority shareholders exert their rights to vote in the AGMs, this rarely has an influence on the overall decisions taken by the majority shareholders.
In addition, the costs associated with setting up a joint stock companies and keeping it running, can be significantly higher than those associated with sole trader individual business entities. Generally, joint stock companies require higher levels of paperwork, accounting, and legal services than the less demanding forms of ownership structures.
Furthermore, joint stock companies require shareholders to periodically invest capital in the company, in order to maintain the company’s working capital and for any expansion. This additional capital may be harder to raise due to the limitations of the stock market and the demand for the company’s shares.
How to Start a Joint Stock Company
Starting a joint stock company requires a few steps, such as determining the company’s Memorandum and Articles of Association, creating a business plan, obtaining a certificate of incorporation, and electing a board of directors. A business plan is often one of the most important steps in starting a joint stock company as it outlines the company’s goals, objectives, and strategy.
When it comes to selecting a board of directors, it is important to find experienced individuals with a diverse set of skills. The board of directors should be able to provide strategic guidance, manage the company’s operations, and fulfil its other fiduciary duties.
Other steps involved in starting a joint stock company include assess the financial state of the company, registering shareholders, setting up the funds for working capital, recruiting and training employees, getting insurance policies, and registering with the federal and state governments. Last but not least, the company must keep accurate financial records to ensure compliance with all applicable regulations.
Common Practices in Joint Stock Companies
Common practices in joint stock companies include making profits and distributing dividends to its shareholders. A company can increase its share value by issuing new shares to the public, which helps the company raise funds for various purposes. Companies must also hold Annual General Meetings to review the performance of the company, approve or reject the company’s financial statements, and elect new boards of directors.
Shareholders with majority control can use their powerful positions to benefit themselves and their families. The board of directors can vote to increase the share price and dividend rate, which can result in high profits for the majority shareholders and their associates. This practice, however, isn’t illegal, but it can be unethical if it is done at the expense of the minority shareholders.
It is also common practice in joint stock companies to pay workers with a combination of wages, shares, and options. This type of arrangement allows workers to gain part ownership of the company, while simultaneously receiving a competitive salary or wage. This encourages workers to be committed and stay with the company, and it also incentivizes them to work harder and achieve better results.
Overall, a Joint Stock Company is a great way to share ownership and profits of a business, however, it is important to note that it also comes with certain risks and costs. It is important to do research and understand all the legal requirements before setting up a joint stock company. Additionally, it is important to ensure that all common practices, such as issuing new shares and awarding shares to employees, are done in a fair and equitable manner.