Corporate Finance Tutorials
- Equity Capital
- Equity Financing
- Pecking Order Theory
- Private Placement of Shares
- Financial Market
- Functions of Financial Markets
- Money Market vs Capital Market
- Right Issue vs Bonus Issue
- Rights Issue
- Joint Stock Company
- Short Term Vs Long Term Capital Gains
- Equity vs Fixed Income
- Stock vs Real Estate Investment
- Fixed Capital
- Internal Sources of Finance
- Investment Vs Savings
- Manage Your Money
Joint Stock Company Definition
A joint-stock company is a company that is owned by investors who have bought shares in the company. The capital is represented by shares owned by its members. The business is generally conducted with the intent to make profits and the profits are thereby shared by the owners in proportion to the shares held by them. These shares are transferable without the consent of the other shareholders and such transfer does not affect the continuation of the company.
Joint Stock Company Examples
Smith & Co. needs capital to carry out its expansion. It issues 1,000 shares with a face value of $10 each at a share premium of $5 per share. Calculate the total amount of proceeds raised by Smith & Co.
The total amount of proceeds raised by Smith & Co. is $15,000.
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Wright Inc. issued equity shares of $10 each at $15. This money is payable as follows:
- $4 on Application
- $6 on Allotment (including share premium)
- $5 on Final Call
Applications were received for 10,000 shares and all the applications were accepted. Pass journal entries in the books of Wright Inc. Also, calculate the total proceeds from the issue.
Screenshot of the detailed calculation in excel template
In order to calculate the total proceeds from the share issue, go to cell B5 and put the formula = B2+B3+B4.
The total proceeds from the issue are $1,50,000.
Types of Joint Stock Company
#1 – On the Basis of a Number of Members
- Private: A private limited company satisfies 3 conditions: a) It limits the number of members to a certain number specified in the relevant Companies Act b) It restricts the right to transfer shares and c) It prohibits any invitation to the public to subscribe to shares or debentures of the company.
- Public – Generally, there is no upper limit on the number of members of such a publicly traded company. The shareholders are free to purchase or sell shares of the company. It can make a public offer to issue shares or debentures of the company.
#2 – On the Basis of Liability
- Unlimited Liability – The liability of shareholders in such a company is unlimited. In other words, the personal property of the shareholders can be used to meet the obligations, if necessary.
- Limited Liability – This is the most common form of company. The liability is limited to the extent of the value of shares held by shareholders
- Limited by Guarantee – The shareholders have to pay a fixed amount in the event of liquidation of the company. The fixed amount is specified in the Memorandum of Association.
On the Basis of Ownership
- Government: A company in which not less than 51% of the shares are held by the Central or State Government or by a combination of Central or State Government is a Government company.
- Non-Government: A company where the majority of the stake is owned by private individuals/institutions is known as a Non-government Company.
Features of Joint Stock Company
- Since generally, joint-stock companies involve limited liability, the personal wealth of shareholders is not affected.
- The retirement/insolvency/death of a shareholder does not affect the continuity of the operations of the company.
- There is no upper limit on members of the company in the case of public companies. Thus, the company can garner huge financial resources from them.
- The company can issue shares and debentures to raise financial resources for operating requirements and expansion.
- The Board of Directors who manages the company is generally professional, experienced, qualified and efficient. This increases the probability of the company is well managed.
- Good management and public display of documents have the effect of a company being considered a reputed form of corporate structure with good public perception.
Limitations/Disadvantages of Joint Stock Company
- The creation and administration of a joint-stock company involve a number of legal formalities and documentation. It is also costly to form and administer a company.
- There may be a conflict of interest between different stakeholders such as owners, employees, the Board of Directors, lenders, etc.
- Certain documents such as financial results are to be compulsorily filed with the Registrar of Companies. This implies there is an absence of privacy and secrecy in the affairs of the company.
- Generally, the company’s profits are taxed and dividends, when declared are also taxed. This implies there is dual taxation.
Important Points to Note about Change in Joint Stock Company
- When a particular shareholder in a joint-stock company transfers his shares to another, it does not affect the continuation of the company. Retirement, death, and insanity of a particular member do not affect the company.
- A private company can be changed to a public company by carrying out formalities given by law.
- The Memorandum of Association and Articles of Association, which are two important documents, need to be amended if changes are to be brought in the company.
Joint Stock Company is one of the most important forms of organizational structure. Today, numerous businesses have organized themselves as joint-stock companies. Companies control humungous financial, physical and other resources. Though joint-stock companies have their limitations, it makes immense sense to organize into a joint-stock company especially if one needs to scale up a business.
This has been a Guide to what is Joint Stock Company and its definition. Here we discuss most common types of joint stock companies along with examples, features, limitations etc. You can learn more about Corporate Finance from the following articles –
- What is Stock Premium?
- What is Stock Warrant?
- Par Value of Share Meaning
- Callable Preferred Stock Meaning