A joint-stock company is a business entity which is owned by shareholders. Each shareholder owns the portion of the company in proportion to his or her ownership of the company's shares (certificates of ownership). This allows for the unequal ownership of a business with some shareholders owning a larger proportion of a company than others. Shareholders are able to transfer their shares to others without any effects to the continued existence of the company. In modern corporate law, the existence of a joint-stock company is often synonymous with incorporation (i.e. possession of legal personality separate from shareholders) and limited liability (meaning that the shareholders are only liable for the company's debts to the value of the money they invested in the company). And as a consequence joint-stock companies are commonly known as corporations or limited companies. Some jurisdictions still provide the possibility of registering joint-stock companies without limited liability. In the United Kingdom and other countries which have adopted their model of company law, these are known as unlimited companies. In the United States, they are, somewhat confusingly, known as joint-stock companies.
Joint Stock Company
Prof. L. H. Haney - "A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership."
Characteristics of Joint Stock Company
The analysis of above definitions reveals the following characteristics of a company:
Association of persons
A company is a voluntary association of persons established for profit motive. A private company must have at least two persons and the public limited company must have at least seven persons to get it registered. The maximum number of persons required for the registration in case of private company is fifty and in case of public company there is no maximum limit.
A company is an artificial person. It is created by law. Like that of the natural person, it can own property, incur debts, file suits, enter into contracts with others under its own name. It can be sued and fined but cannot be imprisoned.
Separate legal entity
A company being created under law has a separate entity from its members. Any of its members can enter into contracts with others. A member cannot bind a company by his acts or dealings with the third parties. The company can file a suit against its members and its shareholders can also sue the company. Further, a shareholder is not liable for the acts of the company even though he may be holding all the shares of that company.
The liability of the members or shareholders is limited to the extent of the value of shares held or the amount guaranteed by them. The shareholders are not personally liable for the debts of a company beyond that limit.
Transferability of shares
The shares of a public limited company are freely transferable and can be purchased and sold through the stock exchanges. A shareholder of a public limited company can transfer his shares without the consent of other shareholders. But there are certain restrictions on transferability of shares in case of private limited company.
Since a company is an artificial person, it cannot put its signature on any document. Therefore, it is statutory for every company to have a seal on which the name of the company is engraved. Affixing of seal on any document signifies the signature of the company. Of course two directors have to sign as witnesses in such .cases.
Separation of ownership from management
The shareholders are the owners of the company. They are heterogeneous group of people who are widely scattered throughout the country and abroad. The shareholders elect their representatives called directors to manage the company. Thus, the company is managed by directors rather than the shareholders. This results in separation of ownership from management.
The company enjoys a continuous existence. Its existence is not affected by death, lunacy or insolvency of its shareholders or directors as the case in partnership or sole proprietorship. The company can only be dissolved by the operation of law.
A joint stock company raises its funds through issue of shares to general public. Due to the small denomination of the shares, the company provides investment opportunities to all sections of people who want to put their surplus money in the company's share.
A joint stock company has to function as per the provisions of the Companies Act. The accounts are to be audited by qualified auditors. Such accounts and exports are published for the information of all stakeholders. Regular and timely reports are to be submitted to the Government.
A company cannot go beyond the powers mentioned in the abject clause of the Memorandum of Association. Therefore, its action is limited.
The Advantages Company
While opting company form of business, the entrepreneur should clearly gone through the distinction between company with partnership form of business. The next step arises a regard to why to go for company form of business. The following points depicts the advantageous points of this form of business.
A company can raise large amount of resources from the genera public by issuing shares. Since, there is no maximum limit of the number of shareholders ii case of public company, fresh shares can be issued to meet the financial requirement. Capita can also be obtained by issuing debentures and accepting public deposits.
The liability of the shareholders is limited to the extent of the face value of the shares held by them or guarantee given by them. The shareholders are not liable personally for the payment of debt of the company. Thus, limited liability encourages the investors to put their money in the shares of the company.
Transferability of shares
The shares of the public company are transferable without any restriction. A shareholder can sell his shares at any time to anybody in the stock exchange Therefore, the conservative and cautious investors are also attracted to invest in the shares of public company. This brings liquidity to the investors.
Stability of existence
A joint stock company enjoys perpetual succession. It continues for a long period of time because it is unaffected by the death, insolvency of the shareholders directors. Change of ownership and management also does not affect the continuity of the business.
A company can hire the services of professional manager for its functional areas because of its financial strength. The directors who look after the management of the company are generally experienced and persons of business acumen Therefore, the management of a company is sure to be efficient.
Scope for expansion
A company can generate huge financial resources by issuing shares and debentures to finance new projects. Companies also transfer a portion of their profit to reserve which can be utilized for future expansion. The managerial capabilities a the disposal of a company helps it for planning the future expansion and growth.
Economies of large scale production
The company is in a position to undertake large scale operation because of its huge financial resources. When the scale of operations i large, the economies in buying, selling, production etc. are enjoyed by the undertaking. The economies of large scale enables the company to produce goods at lower cost and supply the same to the consumers at cheaper prices.
A company submits required information to the Government and other authorities at regular intervals. The accounts of the company are audited by chartered accountants and also published for the information of the stakeholders and others. This enables a company to enjoy the trust and confidence of the public.
A joint stock company provides a number of benefits to the society. 1 creates employment opportunity, investment opportunity, utilizes the unutilized natural resource of the nation, supplies quality products and services at cheaper rate and generates revenue for the Government and also undertakes many infrastructural developmental programmers in the country.
The entire business risk of a company is distributed over a large number of shareholders. Thus, the risk is reduced for each shareholder. No shareholder is burdened with more than what he has paid as the price of shares hold. No personal property will be attached for the same.
As a separate entity, companies pay income tax at a flat rate. Because of this, the company's tax burden on higher income is less in comparison to other forms of business organization. Companies also avail tax exemptions deductions and concessions for undertaking their operations in specific areas, dealing with nature of goods and services and others.
Disadvantages of Joint Stock Company
Despite the above advantages, the company form of organization also suffers from certain demerits. The following are some of the important demerits of a company which every entrepreneurs should know while going for selection of type of business.
Difficulty in formation
The formation of a joint stock company is very difficult, time taking and expensive as compared to any other form of organization. Conceiving the very idea and getting it implemented is very difficult process. Preparation of the basic documents like memorandum of Association and Articles of Association, fulfilling legal formalities as per the Act and getting the business registered needs lot of time, money and expertise.
The management of company is democratic in theory but oligarchic in practice. It is controlled by a small group of Board of Directors who hardly protect the interest of other shareholders. They may manipulate the things with an intention to be re-elected as directors. That is why it is said that shareholders do nothing, know nothing and get nothing.
Delay in decision-making
The Board of Directors of the company decides about the policies and strategies of the company. Certain decisions are taken by the shareholders. The meeting of the directors or the shareholders cannot be held at any time as and when required. Thus, the decision making process is usually delayed. The delay in decision-making may result in losing some business opportunities.
Separation of ownership and management
The company is not managed by the shareholders but by the directors who are the elected representatives of the shareholders. The directors and managers may lack the personal initiative and motivation to
manage the company efficiently as the shareholders (owners) themselves would.
Lack of secrecy
Each and every business strategy is discussed in the meeting of the Board of Directors. The annual accounts are published and compliance to Government, Tax authorities etc. are made at regular intervals. Therefore, it is very difficult to maintain business secrecy in a company form of organization in comparison to sole proprietorship and partnership.
Speculation in shares
When profit is earned by manipulating the prices of shares without actually holding the shares, it is considered as speculation. A company provides scope for speculation and the directors and managers may derive personal benefit out of this. It is harmful to the innocent small shareholders who invest their hard earned money with a view to get higher rate of return.
The possibility of starting a bogus company, collecting huge sums of money and subsequently bringing liquidation of the company is not ruled out. The promoters with an intention to defraud may indulge in such practices. The directors and managers may function for their personal gain overlooking the interest of the company.
Concentration of economic power
The company form of business gives scope for concentration of economic power in the hands of a few through multiple directorship and creation of subsidiary companies. Some persons are elected as directors in a number of companies. These directors formulate policies of the company which will safeguard and promote their own interest. Majority shares of other companies are purchased to create subsidiary companies.
Excessive Government regulations
A company functions under too much of regulations of the Government. Reports are to be filed and compliance are made at regular intervals to appropriate authorities failing which penalty is imposed. A considerable time and money of the company is involved in the process of regular compliance.
Evils of Factory system
Due to large scale operation, the company may give rise to insanitation, pollution, congestion and some social evils like migration from villages to towns, shifting from agriculture to industry etc. They cause instances in the society.
Types of Join Stock Company
1. Chartered Company The companies that form by the order of the king of England are called the charter company. These companies were formed before 1844. For example, East India Company, Chartered Bank of England, the charter of the British South Africa Company, given by Queen Victoria (More information here)
2. Statutory Company Companies that are formed by the order of the President, or by the Legislative Committee or by bill of Parliament are called Statutory Company. These Companies are operated by those laws. For example, municipal councils, universities, central banks and government regulators, Central Bank. (More information here) 3. Registered Corporation Companies that are formed under the prevailing law of the company are called the registered company. The corporation that has filed a registration statement with the SEC prior to releasing a new stock issue. It is two typesi) Unlimited Company: The liabilities of the shareholders of this company are unlimited. For example, British all-terrain vehicle manufacturer Land Rover, GlaxoSmithKline Services Unlimited. ii) Limited Company / limited corporation: The liabilities of the shareholders are limited. For example, Charitable organisations, Financial Services Authority. This liability of a company can be of two types. a) By Guarantee b) By share value. The company limited by share can be of two types. • Private Limited Company, where the number of shareholder ranges from two to fifty. The share of these companies can’t be traded in the stock market. • Public Limited Company, where the number of shareholder ranges from seven to share limitation. The share of the public limited company is traded in the stock market.
Procedure of Formation of a Joint Stock Company
In "Bangladesh" perspective (but the moreover same process all over the world) Joint Stock Company is formed, registered and guided by the Companies Act 1994. The promoters by themselves or by their
appointed person (advocate, consultancy firm, or consultant) undertook the task of formation. However, the task of formation could be discussed in steps. 1. Promotional Steps: The person who undertook the task of formation is called promoter or entrepreneur. For Public Limited Company there should be at least seven (7) and for Private Limited company, there should be at least two (2) promoters. These promoters undertook the following tasks: a) Planning: Here the promoters decide about the objectives, area, type, capital structure of the new business. Based on these factors, the promoters go forward. b) Feasibility Analysis: Here the promoters undertook the feasibility analysis for the new venture: both from existing and potential view point. Promoters undertook different tools like SWOT (Strength, Weakness, Opportunity and Threat) Analysis; Competitive Analysis, etc. Being assured of the potentiality of the business the promoters go for the further. c) Naming the Company: The name of the company should be such that is not used by any other existing company; it is not a name of the King or Queen or President. The Public Limited Company should use (pvt.) Limited and the Public Limited Company must use Limited at the end of the company name. The promoter upon deciding the name, they submit the name in black and white for Clearance in the registrar office. The registrar upon verifying the uniqueness of the proposed name gives clearance of using the name. 2. Registration or Incorporation: To incorporate the new company the promoters needs go through the following steps: a) Collecting Registration Form and Filling it up: The promoters have to collect the registration form and other papers for a fee from the registrar office. Then they should fill up it by them selves or should take the help of the consultants or advocates. b) Preparing Documents and Submitting for Registration: The promoters have to submit the filled-up form with fees and the following documents in the registrar office: • Memorandum of Association
• Articles of Association • Capital Structure of the proposed Company • List of Directors and the amount of the sponsored share they purchased • Declaration regarding the proposed name of the company • Declaration of an advocate or chartered accountant or any director of a proposed company that the company has followed all the rules and regulations of Company Act 1994. The registrar being satisfied on the paper submitted for the proposed company issues' Certificate of Incorporation. On getting that certificate the Private Limited Company can start its business but the Public Limited Company has to go to another step to start its business. c) Obtaining Certificate of Commencement: Here the promoters should make the Prospectus for the company. This prospectus needs to be published in the daily newspaper. To get the Certificate of Commencement, the promoters need to submit the following documents to the registrar: • A copy of Prospectus • Name, address, designation, occupation, etc. of Directors • Directors’ written Letter of Agreement that they want to work as director of that company. • Declaration that the directors have fully paid the minimum amount of sponsor share. • Declaration by the company secretary or other authorized person that the above affairs have maintained all rules and regulation of Company Act 1994. The registrar being satisfied on the paper submitted for the proposed company issues' Certificate of Commencement. On getting that certificate the Public Limited Company can start its business.
3. Flotation Stage If the sponsor directors are unable to provide the adequate capital, public limited company can float their share in the capital market (Stock Exchange) to get required capital. By this time, the company can do its other functions.
The difference between Private Company and Public Company
The following differences between a private company and a public company can be drawn: Private Company
1.It's minimum number of persons is two and the maximum is 50. 2.It makes the use of private limited after its name. 3.It can commence its business operation after getting certificate of incorporation. 4.The memorandum of association and the articles of association is signed by at least two persons. 5.The filling of both memorandum and article of association is obligatory. 6.It does not require the filling of the prospectus or statementin-lieu of prospectus. 7.It cannot sell shares to the general public in the open market.
1.It's minimum number of persons is seven and the maximum is unlimited. 2.It makes the use of the word limited after the name. 3.It requires both the certificate of incorporation and the certificate of commencement for its commencement. 4.It's memorandum and articles of association is signed by at least seven persons. 5.It may not have its own articles of association because it may adopt table 'A'. 6.It must file prospectus or statement in lieu of prospectus before allotment of shares. 7.It sell shares to the general public in the open market. 8.Transfer of shares is not
8.Transfer of share is restricted in the articles of association. 9.There are of least two directors and they need not retire by rotation. 10.There is no legal restriction on director's remuneration.
restricted and as such shares are freely transferable and are quoted in the stock exchange. 9.It has at least 3 directors and they are subject to retire by rotation. 10.The directors cannot draw remuneration more than 11 percent of the net profit of the company.
Memorandum of Association
Memorandum of Association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act “The purpose of Memorandum of Association is to enable the share holders, creditors and those who deal with the company to know what its permitted range of enterprise is.” - Lord Macmillan
Articles of Association
A document that specifies the regulations for a company's operations. The articles of association define the company's purpose and lays out how tasks are to be accomplished within the organization, including the process for appointing directors and how financial records will be handled.
Difference between Association
Memorandum and articles are public documents. They are inter-linked and require to be registered for the formation of a company. Where there is any ambiguity or where the memorandum is silent on any point, the articles may serve to explain or supplement the memorandum. Beyond this, the two documents have nothing in common and differ from one another in the following respects:
1. Memorandum of association is the charter of the company and defines the scope of its activities. Articles of association of the company is a document which regulates the internal management of the company. These are the rules made by the company for carrying out the objects of the company as set out in the memorandum. 2. Memorandum of association defines the relation of the company with the rights of the members of the company interest and also establishes the relationship of the company with the members. 3. Memorandum of association cannot be altered except in the manner and to the extent provided by the act, whereas the articles being only the byelaws of the company can be altered by a special resolution. 4. Memorandum is a supreme document of the company whereas articles are subordinate to the memorandum. They cannot alter or control the memorandum. 5. Every company must have its own memorandum. But a company limited by shares need not register its articles. In such a case table A applies. 6. A company cannot depart from the provisions contained in its memorandum, and if it does, it would be ultra-vires the company. Anything done against the provisions of articles, but which is intravires the memorandum, can be ratified.
The Characteristics of Joint Stock Company
The Advantages and Disadvantages of Joint Stock Company
Types of Join Stock Company
The difference between Private Company and Public Company
Definition of Memorandum of Association
Definition of 'Articles Of Association'
Difference between Memorandum and articles of Association