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What Is A Joint Stock Company? History And Example Of It: Preference And Equity Shares

Referencing Styles : APA | Pages : 1

The company that is owned by shareholders is called a joint stock company. Other than a larger publicly traded company, in joint stock company the total capital is divided into number of shares, all the members of the company are entitled to have shares in the business. In a joint stock company, there are many number of shares that can be distributed as part of the company ownership. These include preference shares, bonus shares, right shares, sweat equity shares, and employee stock option plans.

Another characteristics of the joint stock companies is that they have limited liability. This is a very essential feature of the joint stock company as it indicates that the shareholders of the joint stock company are only liable for that portion which the shareholder is holding as share. If the company declares it self as insolvent or bankrupt, then in that case the shareholders will only lose their investment not their personal funds or resources.

A joint stock company issue shares just like other public limited company that trades in a registered exchange. The joint stock holders can purchase or sale these shares freely in the market. But unlike ordinary shares or preferred shares, the shares of the joint stock company carry explicit obligations. Holders have a direct vote in the company management decisions as well as a joint and several liabilities for the for the company’s outstanding debts.

The features of the joint stock company are stated below

Separate legal existence

Like all other business entity, the joint stock entities are also entitled to have a separate legal existence that is separate from its owners. Which means that in case the owners do any act on behalf of the company the company will not be held responsible for such acts. It can sue in a court of law in its own name.

Long life

The life span of the joint stock company is more than the private or public company. If any shareholders died the existence of the company will not come to an end it will continue its operation.

Distribution of profit

The basic aim of the joint stock company to earn profit. The profit that is earned by the company will be distributed to the shareholders in proportion of the amount of shares held by them. the company transfer some portion of the profit to the reserve funds.

Limited liability

The liability of the shareholders is limited to the amount of shares held by them. There is no liability on the private property of the shareholders. This ensure that in case the company goes for bankruptcy then the shareholders will not be held liable to setoff the debt by selling their own property.

Number of the members 

The minimum number of members required to form a joint stock company is seven and the there is no limit for the number of maximum members.

Management

In the annual general meeting the members select the board of directors. so all the management is conducted by the board of directors. Shareholders are not allowed to participate directly in the management.

Transferability of shares

A shareholder of a joint stock company can transfer his shares easily to other persons. There is no restriction on the buying and selling of the shares.

Capital borrowing

Joint stock company can borrow capital in its own name and can utilize such capital for the expansion of the business.

Changing business

A joint stock company cannot change the nature of the business with out the prior approval of the court. The changing process is very critical and lengthy process and requires many legal process.

Trade agreement

A joint stock company may join the trade agreement with other firms in its own name as the joint stock company has a separate existence.

Common seal 

The company does not have the right to sign any document by itself. So the common seal with the name of the company is used as a substitute for its signature.

Payment of double taxes

The company has to pay the taxes on the whole dividend. secondly the shareholders pay tax on their individual income. so a joint stock company pays double taxes to the government.

Government control

The joint stocks company has to follow the rules of the government, it has also to provide various report to the register of the company. The joint stock company has to audit its accounts on regular basis.

Purchase and sale of property

The joint stock company get the opportunity to purchase and sale property in its name.

The example of the joint stock company is stated below

Assume that Mr. A holds shares of XYZ a joint stock company. These shares give Mr. A, a percentage to vote on company XYZ ‘s management decisions, election of board. The share also gives Mr. A unlimited responsibility for company XYZ’s outstanding unpaid liabilities. In other words, unless Mr. A dispose off the shares of the XYZ he will be liable wholly or partially for all the debts of XYZ company.

Due to the nature of the stock the., the investors who holds the stocks of a joint stock company put their own assets at risk of being liquidated if the issuing company were to file for bankruptcy.

Joint stock company, a forerunner of the modern corporation that was organized for undertakings that require large amount of capital. Money was raised by selling the shares to the investors, who become partner of the in the venture. One of the earliest joint stock company was the Virginia company, that was founded in the year 1606 to colonize north America. By law, individual shareholders were not held to be responsible for the actions that were undertaken by the company, and, in terms of risk exposure, shareholders could lose only amount of their initial investment.

Equity shares

Equity shares are also known as the ordinary shares, they are in the form of fractional or part ownership in which the shareholders, as a fractional owner, takes the maximum amount of risks. The holders of the equity shares are the members of the company and have voting rights. It is the main source through which the company raise long-term capital. The equity shares are the instruments through which the company can raise capital without taking any risk and the company does not require to pay any interest for raising capital from the issuance of the equity shares. The company have to share its ownership with the holders of the equity shares and have to distribute a portion of profit with the shareholders.

Equity shares represents the ownership of a company and capital raised by the issue of such shares is known as ownership capital or owner’s funds. The equity shares are the foundation of the company.

The shareholders enjoy profit  that the company earns during a financial year. As the shareholders enjoy the profit they also have to bear the loss that the company incur the loss. The shareholders are referred as the residual owner. They receive what is left after all other claims on the income of the company’s income and assets have been settled. Through their right on vote, these

The advantages of the equity shares are stated below

Equity capital is the foundation of capital of the company. It stands last in the list of the claims and it acts a collateral security for the creditors.

Equity capital provides credit worthiness for the company and confidence to the perspective loan providers.

Investors who are willing to take a bigger risk for higher return prefer equity shares.

There is no burden on the companies as payment of dividend is not compulsory unless it has been declared.

Equity issue raises fund without creating any charges on the assets of the company.

Voting rights of equity shareholders make them have democratic control over the management of the company.

Like the advantages there are some disadvantage of equity shares these are narrated below

Investors who wants steady income and try to avoid risk does not invest in equity shares.

The cost of equity shares is higher than the cost of raising funds from other sources.

The issue of additional equity shares dilutes the voting power and earning of existing equity shareholders.

Many formalities and procedural delays are involved in the raising of funds through issue of equity shares so it takes time to raise fund by issuing equity shares.

By issuing equity shares the company losses its right to control the entire affairs of the company the equity shareholders will interfere in the affairs of the company.

Conflict of interest is a major problem for the equity shareholders as there will be more numbers of shareholders so the conflict of interest may rise among the different equity shareholders.

Preference shares are the shares which promises the shareholders to get a fixed rate of dividend irrespective of the fact that the company makes profit or run in loss. The preference shareholders get the preference of payment before the equity shareholders. Capital raised by issuing preference shares are called the preference share capital.

The preference shareholders are in superior position over the equity shareholders in two ways. The first one is by receiving a fixed rate of dividend, out of the profits of the company, before the declaration of any dividend for the equity shareholders and second receiving there capital after receiving their capital after the claim of the creditors of the company are settled at the time of liquidation. In short the preference shareholders have preferential claim over dividend and repayment of capital as compared to the equity shareholders.

The preference shareholders do not enjoy the voting rights unlike the equity shareholders. In some cases, the preference shareholders may claim voting rights if they do not get their dividend for more than two years or more on cumulative preference shares.

Types of preference shares

Cumulative preference shares

The cumulative preference shares are those shares that have the right to collect unpaid dividends in future in case the same has not been paid during a year. in case of non cumulative preference shares the shareholders will not be eligible to collect the dividend in the future if it is not paid during the current financial year.

Participating and non participating preference shares

Preference shares which have the right to participate in in extra surplus of the company shares which after setting off the dividend are paid at a certain rate has been paid on equity shares are called the participating preference shares. The non participating shares does not enjoy such rights of participation in the profits of the company.

Convertible and non convertible preference shares

The convertible preference shares are those shares that can be converted in to equity shares within a specific period or time as fixed by the company. Non convertible preference shares are those shares which cannot be converted into equity shares at any point of time.

Merits of preference shares

 As it does not have any voting rights so it can not control the management unlike the equity shares.

Payment of fixed rate of dividend to preference shares may make a company to announce higher rates of dividend for the equity share holders in good times.

Preference shares have reasonably steady income in the form of fixed rate of return and safety of the investors.

Type of employee shareholder’s ownership

The different types of employee share holder ownership are stated below

Preference share

These are special stocks that contains fixed rate of dividend and have to be paid in preference to the equity shareholders but after paying the dues of the creditors. The preference shares come in different varieties like the cumulative and non cumulative, participative and non participative preference shareholders and convertible and non convertible preference shares.

Bonus shares 

These shares are given on free of cost by the company to the existing shareholders. It is given to provide a one time benefit to the existing shareholders of the company.

Sweat equity 

Sweat equity are these shares that are issued to the directors or the employees of the company as a reward of their effort. These shares are given either at a discount or for adding value for the company.

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