When you think of all the giant companies globally, like Shell and Mercedes, they’re not proprietorships or partnerships. These companies are all joint stock companies. A joint stock company is the most suitable form of business organization on a global scale.
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What Is a Joint Stock Company?
It’s a business entity, and shareholders can buy and sell shares of the company stocks. Each shareholder owns a piece of the company’s stock, dependent on the money invested.
Once you invest, you receive share certificates of ownership. Furthermore, shareholders can transfer their shares to others without affecting the company’s continued existence.
They’re generally formed to enable a company to thrive and grow. Many companies, especially startups, need funding to grow.
Without money, they can’t build warehouses, buy supplies, hire staff, etc. But, by bringing together many people or “shareholders,” it’s possible to build a thriving business.
The existence of modern-day joint stock companies is often synonymous with incorporation. Shareholders are liable for the company’s debts only to the value of the money they have invested in the company. Therefore these companies are commonly known as corporations.
For a company to be recognized as a separate legal entity and come into existence, it has to be incorporated. Therefore, choosing not to register a joint stock company is not an option. Without incorporation, a company does not exist.
The 5 Second Takeaway
- A joint-stock company is a business entity owned jointly by all its shareholders.
- Shareholders buy and sell shares of the company’s stock
- Every shareholder owns a piece of the company up to the amount invested.
- Limited liability for shareholders
- The life of a company is in no way related to the life of its members.
- A company can only be liquidated under the Companies Act by the rule of perpetual succession.
The Advantages of Joint Stock Companies
There are many advantages to this type of company. Let’s take a look at what these advantages are and how they can help us.
Ability To Raise Money
Generally, a joint stock company has the opportunity to raise a large amount of capital versus other types of businesses. Then, if the company needs money, it can sell its shares to the public.
Diffused Risk
The ability of a shareholder is limited to the face value of the shares they own. He has no further liability if he has paid the total value of the shares he has agreed to.
Perpetual Succession
Perpetual succession is another important advantage of a joint-stock company. The joint stock company is born out of the law. Likewise, the only way for the company to end is by functioning under the law.
A joint stock company survives even if all members are willing to shut it down or if all members die of natural calamities.
Shareholders can sell a joint stock company’s shares to those interested in buying. The right to sell shares of a joint stock company gives the skills to attract many shareholders.
Tax Relief
A company enjoys more tax relief than other forms of business organizations. For example, a company pays a lower tax on a higher income than it pays tax on a flat rate. Moreover, a company gets some tax concessions if it establishes operations in backward areas.
Scalability
Since joint-stock companies can access a lot of cash, they can invest in large-scale production.
Stability
This, in my opinion, is the most essential piece. Upon the shareholder’s death and retirement, the stock sale does not lead to the dissolution of the business.
Ownership comes with additional privileges. Take, for example, the fact that shareholders have a say in pretty much everything.
Without actually having to run the company, they still get a voice. To illustrate, shareholders elect a board of a board of directors to manage the company on their behalf.
Disadvantages of a Joint Stock Company
We just went through the advantages. Now let’s look at the disadvantages. As with anything, there are both good and bad related to everything. So let’s look at the disadvantages you’d face if you invested in this company.
Cost & Complexity
The formation of a company is a long-drawn process. Due to complex procedures and legal requirements, forming these companies can be difficult, costly, and time-consuming.
Lack of Privacy
This company must disclose various reports for those looking to be discrete in their operations. Unfortunately, this makes it difficult to maintain its secrecy.
Potential For Dishonesty
With the help of paid officers, the directors manage the company. However, if the directors are dishonest and misuse their power and position, it can be costly for the company.
Nepotism
Directors and managing agents may appoint their relatives as the essential officers of the company. However, merit may not be given importance.
Delays In Decision Making
Due to the complexity and levels of hierarchy in these companies, there could be delays in decision-making. Approval has to be obtained at different levels and departments before final decisions are made. As a result, missing profitable opportunities is a reality.
Final Thoughts
Despite the potential for ethically questionable practices, investing in joint stock companies is one path to wealth. If you’re still unsure and want to make your money disappear, stick it in a savings account at the bank. If you let $10 do nothing for 65 years, it will become $.93.
Now ask yourself why all of these banks want your unvested money. These banks figured out how to grow money by investing yours, mostly into these companies. Let that sink in.
