A joint stock company is one of how a business is owned and managed where people put in money by purchasing shares and hence become partial owners of the organisation. It thus facilitates resource pooling, accumulating vast capital and managing big businesses. Therefore, we will discuss the pros and cons of joint stock companies to show the positive and negative features. The advantages and disadvantages of a joint stock company are that while it provides limited liability, significant capital, and professional management, it also faces challenges like legal complexities, risk of takeovers, and lack of secrecy.
This comprehensive guide will cover the definition, features, real-world examples, and FAQs related to joint stock companies, helping you understand their role in modern business.
What is a Joint Stock Company?
In other words, a joint stock company is a corporation where ownership and shares are shared among people who can buy and sell these shares by entities or individuals. The owners who own these pieces of paper holding shares are considered shareholders. Further, the concept of a definition of a joint stock company makes it straightforward to have a corporate identity separate and apart from those shareholders.
A joint stock company mainly exists to raise funds from public or private investors. This enables businesses to get significant funds that would be hard to acquire by a sole proprietor or partnership. The joint stock companies are generally categorised into two:
- Public Joint Stock Company: It lists its shares on the stock exchange and thus can sell shares to anyone. It can, therefore, raise capital from many investors.
- Private Joint Stock Company: It holds shares in private and may only sell them on the open market after getting other shareholders to agree to sell their shares.
Joint stock companies are essential to the world economy as they support large industries, technological changes, and foreign trade.
Characteristics of Joint Stock Company
The characteristics of a joint stock company distinguish the company from other forms of business organisation, such as sole proprietorships and partnerships. These characteristics are responsible for companies’ performance, growth, and viability.
Separate Legal Entity
A joint stock company has a separate legal existence. This means the company can hold property, contract, borrow, sue, or be sued in its name. The shareholders do not affect the existence of the company.
This ensures that the company is independent of its owners and has stability and legal security. Therefore, the company’s debts and obligations are the company’s own, and the shareholders cannot be held personally liable. It makes people want to invest because there is no risk of losing their savings over and above the investment.
Limited Liability
The most attractive feature of a joint stock company is limited liability. Shareholders are liable only for the company’s debts up to the amount they invested in shares. Their assets, such as houses or cars, are safe even if the company faces financial troubles or bankruptcy.
This is because the risk associated with these investments is confined. Shareholders are likely to lose only what they had used to buy shares. The personal wealth of shareholders cannot be lost, which is one of the significant reasons why joint stock companies can raise a lot of capital from investors.
Transferability of Shares
Shares in a public joint stock company can freely be sold on the stock exchange. Thus, this transferability leads to liquidity, where the shareholders can sell their investments at any given time for cash in case they need money. In a private joint stock company, shareholders typically approve share transfers.
This ability makes joint stock companies appealing to investors. Investors want to know that they can sell their shares whenever they wish. This also helps the company attract more investors since shares can be sold without affecting the daily running of the company.
Perpetual Succession
A joint stock company has perpetual succession, meaning it continues to exist even if the shareholders or directors die, retire, or sell their shares. The operations of the company are not affected by changes in ownership. This ensures business continuity and stability, essential for long-term projects and investments.
This makes the joint stock companies reliable for the employees, investors, and customers. A sole proprietorship or partnership, which would dissolve once the owner leaves, can be kept running for generations. Therefore, a joint stock company offers excellent opportunities for long-term growth.
Large Capital Base
Since joint stock companies can sell shares to thousands of people, they can raise an immense amount of money. This is particularly the case with public companies as they attract funds from thousands or even millions of shareholders across the globe. A capital base that a company develops would enable a firm to invest in new technologies, expand into new markets, and spend on large projects.
This is another essential feature for manufacturing, technology, and infrastructure sectors as it involves heavy investments. Moreover, firms have a way of surviving hard economic times as they are given a chance to tap into diverse sources of financing.
Professional Management
Experienced professionals appointed by the board of directors run and manage joint stock companies. These managers become providers of specialization in finance, operation, marketing and other fields, so ensure that business moves efficiently and effectively. Professional management reduces the possibility of poor decision making and makes companies compatible with changing market conditions.It also ensures that the company’s resources are effectively used, maximizing the profit for shareholders. This feature distinguishes joint stock companies from small businesses, where management may lack special knowledge.
Joint Stock Company Damage
A joint stock company has many advantages, but also disadvantages.The main disadvantages of a joint stock company are complex rules, lack of privacy and management challenges. Legal insufficiency The establishment and maintenance of a joint stock company is complex cases of law. A corporation has to become registered with relevant government agencies and draft long written legal documents besides adhering strictly to company law and stringent report requirements. A joint stock company is managed by a board of directors elected by the shareholders. The board hires professional managers and experts to oversee the company’s operations. This means the company benefits by adopting the skills and experience of qualified professionals. business partners.
Advantages and Disadvantages of Joint Stock Company
Understanding the advantages and disadvantages of a joint stock company helps evaluate whether this business structure is suitable for specific industries or business goals.
Advantages of Joint Stock Company
A joint stock company provides several benefits for businesses. The key advantages of a joint stock company include limited liability, significant capital, and perpetual succession.
Ability to Raise Large Capital
A joint stock company can collect significant capital because shares can be issued publicly. This means that thousands of investors will pool funds to finance large projects, expand operations, and fund research and development.
Having much capital enables large companies to penetrate the world arena, explore more markets, and adopt sophisticated technological systems. In this case, for example, companies such as Apple and Microsoft rely on shareholding to facilitate their innovation sources. This cushioned the company during the economic recession as the funds were derived from other people.
The Protection of Liability
Shareholders are granted limited liability; they only incur the risk proportional to the amount invested in the firm. Shareholders will not have their assets at risk when the company suffers financial setbacks.
This protection encourages investors to invest in joint stock companies without the risk of losing finances personally. It also urges entrepreneurship since owners can venture with a reduced risk of losing their total wealth. This has been a crucial factor that has enabled global capitalism to grow.
Perpetual Succession
Perpetual succession is an advantage of the joint stock company since it shall never lose succession. Its life is not determinable by succession. This explains that it shall always exist irrespective of whether the shareholder leaves, retires, or dies.
This stability helps with long-term projects and relationships with businesses. Contracts are intact, employees maintain job security, and investors expect continued growth within the company. This is because joint stock companies offer perpetual succession, which proves perfect for huge and transnational enterprises.
Shares Can Be Easily Transferred
The free transferability of shares makes them liquid, as the shareholders can freely buy and sell them on the stock exchange. This free transferability enables shareholders to liquidate their shares by converting them into cash, should they desire.
This freedom attracts more investors since they are not locked into their investments. It also enables companies to raise capital because people are more than happy to buy shares when they know they can sell them quickly. Though transfers are more restricted in private companies, they provide opportunities for share transactions within a controlled group.
Professional Management
Experienced professionals appointed by the board of directors run and manage joint stock companies. These managers become providers of expertise in finance, operations, marketing, and other areas, hence ensuring that the business runs efficiently and effectively.
Professional management reduces the possibility of bad decision-making and makes companies adapt to changing market conditions. It also ensures that the company’s resources are used effectively, maximising the profits for the shareholders. This feature distinguishes joint stock companies from smaller businesses, where management may lack specialised knowledge.
Disadvantages of Joint Stock Company
A joint stock company offers numerous benefits, but it also has drawbacks. The key disadvantages of a joint stock company include complex regulations, lack of secrecy, and management challenges.
Legal Inflexibilities
Establishing and maintaining a joint stock company involves intricacies in law. A corporation has to become registered with relevant government agencies and draft long written legal documents besides adhering strictly to company law and stringent report requirements.
These processes are cumbersome and costly, and small-scale enterprises find it challenging to adapt to this system. In addition, legal compliance calls for the engagement of professionals such as lawyers and accountants, thereby increasing operational costs. Complexity may also hinder the speed of decision-making because specific actions require legal approvals.
Lack of Secrecy
In addition, public joint stock companies must be open to the public. They should share financial reports, operational information, and strategy planning with the public. Openness is of the essence to shareholders, but it also reduces business secrecy. Due to accessibility to competitors, it can prove a disadvantage in increasing competitive advantage.
For example, companies must make public annual reports, quarterly earnings, and shareholder meetings that reveal essential business strategies. This lack of confidentiality can disadvantage industries where trade secrets are the essence of success.
Conflicts of Interest
The most recurrent conflict between shareholders, management, and the board of directors in joint stock companies is over short-term versus long-term gains. Shareholders may want quick returns, while managers look towards capital appreciation in the long run. Such interests clash and affect business decisions.
For instance, shareholders demand more dividends while the company should retain profits to expand. That is a very challenging issue that requires proper governance and communication, which are not easy issues in large organisations.
Risk of Takeover
A public joint stock company freely trades its shares, which enables one or a group of individuals to gain a majority share and dominate the firm. Hostile takeovers are risky, which may destabilise the organisation and deter the employees from their work.
A hostile takeover may lead to management changing the brand business approach and might dismiss some employees. Companies have defensive tactics for takeover, which can be expensive and complicated.
Expensive to operate
A joint stock company is very costly to run because it has to meet legal requirements, administrative expenses, auditing fees, and other regulatory requirements. It has to keep detailed records, conduct regular audits, and employ professionals for its legal and financial affairs.
These charges are substantially higher than those of sole proprietorships or partnerships. Although large corporations can easily bear these expenses, they can also be challenging for small-sized joint-stock corporations.
Examples of Joint Stock Company
Several well-known international companies operate under the leadership of joint stock companies. Such companies possess huge capital, skilled management, and international standards.
Apple Inc. (Public Joint Stock Company)
Apple Inc. is one of the world’s largest technology companies. The firm sells various products, including iPhones, iPads, and MacBooks. Apple shares are quoted on the NASDAQ stock exchange, and millions of shareholders own a slice of the firm. The funds generated from the shareholders will help the firm invest in research, develop new technologies, and expand its global market.
Reliance Industries (Public Joint Stock Company)
Reliance Industries is a significant Indian conglomerate with businesses in the energy and petrochemical sectors. It is a public joint stock company listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The capital raised from public shareholders has proved to be a windfall for growth and has allowed it to become one of the largest companies in India.
Tata Consultancy Services (Private Joint Stock Company)
Tata Consultancy Services (TCS) is an IT multinational company in India. Although a public company, it is heavily owned by the Tata Group. TCS provides IT services, consulting and business solutions across the world. That’s because its joint stock features help attract investments while keeping control of the parent company.
Merits And Demerits Of Joint Stock Company FAQs
1. What is a joint stock company?
A joint stock company is an organisation of business where the ownership is divided into shares. In this way, people who buy these shares become part owners or shareholders. The company has a separate legal existence and owns the property. It can enter contracts and exercise all rights of its own without interference from its shareholders.
2. What are the advantages of joint stock company?
The advantages include enormous capital, shareholder liability protection, professional management, easy transfer of shares, and business continuity through perpetual succession.
3. State some Disadvantages of a joint stock company
The disadvantages are complex legal procedures, no business secrecy, risk of conflict of interest among shareholders, risk of hostile takeover, and high operational costs.
4. State some examples of joint stock companies.
Examples include Apple Inc., Reliance Industries, and Tata Consultancy Services. All are operating on the global scene; they raise funds from the shareholders and are under professional management.
5. What are the types of joint stock companies?
There are two broad types. The first is public joint stock companies whose shares are traded in the stock markets, and the second is private joint stock companies in which the shares are kept secret and cannot be offered for sale without getting permission from the shareholders first.
