Chapter -4

JOINT STOCK COMPANY

Definition:
A company is a legal entity formed by a group of individuals to engage in and operate
a business—commercial or industrial—enterprise. A company may be organized in
various ways for tax and financial liability purposes depending on the corporate law of its
jurisdiction.
Joint stock company is an organization which is owned jointly by all its shareholders.
Here, all the stakeholders have a specific portion of stock owned, usually displayed as a
share.
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.
Each joint stock company share is transferable, and if the company is public, then its
shares are marketed on registered stock exchanges. Private joint stock company shares can
be transferred from one party to another party. However, the transfer is limited by
agreement and family members.
Features of Joint Stock company:
1. Registration– A Company comes into existence only after registration under the
Companies Act. But a Statutory Corporation is formed and commence business as notified
or stated in the Act and as passed in the Legislature.
2. Voluntary Association– A Company is an association of many people on a voluntary basis.
Therefore a company is formed by the choice and consent of the members.
3. Capital– A Company must have a capital, otherwise it cannot work.
4. Perpetual Succession – The Company has Perpetual Succession. The death or insolvency
of a shareholder does not affect its existence. A company comes into end only when it is
liquidated according to provision of the Company Act.
5. Legal Personality– A Company is regarded by law as a single person. It has a legal
personality. This rule applies even in the case of “One-man Company.”
6. Limited Liability– The liabilities of shareholders of a company are usually limited.
According to the Company Act 1994 of Bangladesh, the liability of shareholder may be
limited by share or limited by the guarantee .
7. Transferability– The shareholder of a company can transfer its share and ordinarily the
transferee becomes a member of the company.
 8. Statutory Obligation– A Company is required to comply with various statutory
obligations regarding management, e.g., filling balance sheets, maintaining proper
account books and registers etc.
9. Common Seal– Company cannot sign on any contract because it is artificial person and
it works with common seal.
10. Right To Sue– Company can sue on other parties like natural person for protecting its
assets and properties. Other persons can also change on the company.
11. Financial Power– A Company is given exclusive power and the only medium of
organizing business which is given the privilege of raising capital by public subscription
either by way of shares or debentures.
Advantages of Joint Stock Company:
1. Limited Liability: The liability of shareholders, unless and otherwise stated, is limited to
the face value of shares held by them or guarantee given by them.
2. Perpetual Existence: Deaths, insanity, insolvency of shareholders or directors do not affect
the company’s existence. A company has a separate legal entity with perpetual succession.
3. Professional Management: In company business, the management is in the hands of the
directors who are elected by the shareholders and are well experienced persons. In order to
manage the day-to-day activities, salaried professional managers are appointed. Thus, the
company business offers professional management.
4. Expansion Potential: As there is no limit to the maximum number of shareholders in a
public limited company, expansion of business is easy by issuing new shares and debentures.
Companies normally use their reserves for expansion purposes.
5. Transferability of Shares: If the shareholders of a company are displeased with the
progress of the business, they can sell their shares any time. During all this change of
ownership, the business continues to operate.
6. Diffusion of Risk: As the membership is very large, the whole business risk is divided
among the several members of the company. This is an advantage particularly for small
investors.
 Disadvantages of Joint Stock Company:
1. Complex procedure of formation: The procedure for setting up a company is cumbersome. It
involves a number of stages starting from the promotion which is an expensive job. The shares
are to be sold in the stipulated time. The legal formalities are extensive too.
2. Lack of Secrecy: As per the legal provisions, a company has to make various statements
available to the Registrar of the Companies, Financial Institutions; the secrecy of business comes
down. It is further reduced when the company provides its annual report to the shareholders as the
competitors do also find out the details of all financial data.
3. Restrictions: Compared to proprietorship and partnership, a company has to comply with more
legal requirements. It consumes considerable time and effort.
4. Management Mischief’s: Sometimes the managers and directors misuse the company resources
for their personal benefits. This brings losses to the company and company is closed.
5. Lack of Personal Interest: Unlike proprietorship and partnership, the day-to-day affairs of a
company are looked after by salaried managers. Since they are the employees not the owners,
they do have hardly any personal interest and commitment in the company. This may result in
inefficiency and, in turn, losses.
6. Delay in decision making: The long hierarchy of the organization delays the decision process,
the non-transparency of business secrets cannot be maintained as there are a lot of members
involved.
Types of Companies Based on The Number of Members
Based on the number of members/shareholders of the company; 2 types of companies are (1) public limited company, (2)
private limited company.
1. Public limited company: Public limited companies are listed on the stock exchange where it’s share/stocks are traded
publicly.
A public limited company
• must have a minimum number of members which is mandatory by the company law (in Bangladesh it is 7),
• It can have an unlimited number of members,
• operates as a separate legal entity from its owners,
• Trades stocks publicly,
• publishes the complete and true financial position of the company which is required by law so that investors can determine
the true worth of its stock (shares),
• has limited liability, which is by shareholders share.
• shareholders of a public limited company are limited to potentially lose only the amount they have paid for the shares they
own.
2. Private limited company: A private company has a separate legal entity, owned entirely by a relatively small group of
individuals or groups (minimum 2), and shares cannot be publicly traded in stock markets.
A private limited company
• has separate legal entity from its owners,
• does not require to publish the company’s financial positions,
• must have a minimum of 2 members and a maximum number of members (usually 50) that is defined in the country’s
company law,
• has limited liability,
• faces fewer regulations and government oversight than a public limited company.
 Types of Companies Based on Liabilities
When we look at the liabilities of members, companies can be limited by shares, limited by
guarantee or simply unlimited:
a) Companies Limited by Shares
Sometimes, shareholders of some companies might not pay the entire value of their shares in
one go. In these companies, the liabilities of members is limited to the extent of the amount not
paid by them on their shares. This means that in case of winding up, members will be liable
only until they pay the remaining amount of their shares.
b) Companies Limited by Guarantee
In some companies, the memorandum of association mentions amounts of money that some
members guarantee to pay. In case of winding up, they will be liable only to pay only the
amount so guaranteed. The company or its creditors cannot compel them to pay any more
money.
c) Unlimited Companies
Unlimited companies have no limits on their members’ liabilities. Hence, the company can use
all personal assets of shareholders to meet its debts while winding up. Their liabilities will
extend to the company’s entire debt.
Differences between Public limited companies and Private limited companies
Point of Public limited companies Private limited companies
differences
Definition Registered as a public company. Any company that is not a public company.
Minimum 07 02
shareholder
Maximum Limited by share. 50 (Fifty).
shareholder
Raising capital May raise capital by advertising its Prohibited from offering its securities to
securities (shares and debentures) as the public.
available for public subscription.
Start of trading Must obtain trading certificate from Can begin from date of incorporation.
registrar before commencing trading.
Directors Minimum three. Minimum two.
Prospectus It has to issue prospectus before issuing Cannot issue prospectus.
share.
Name of the A public limited company has to add the A private limited company has to add the
company word ‘Limited’ at the end of its name. words ‘Private Limited’ at the end of its
name.
Stages of Company Formation :
The whole process of company formation can be divided into four stages as given below:
a. Promotion of a Company,
b. Registration of a Company,
c. Certificate of Incorporation and
d. Commencement of the Business.

a. Promotion of a Company : Promotion is the first step in the formation of a company. In this
phase, the idea of starting a business is converted into reality with the help of promoters of the
business idea. In this stage the ideas are executed. The promotion stage consists of the following
steps:
• Identify the business opportunity and decide on the type of business that needs to be done.
• Perform a feasibility study and determine the economic, technical and legal aspect of
executing the business.
• Interest shown by promoters towards the business idea and supply of capital and other
necessary procedures to start the business.
b. Registration of a Company: It is registration that brings a company into existence. A
company is properly formed only when it is duly registered under the Company Act 1994.
In order to get the company registered, the important documents required to be filed with
the Registrar of Companies are as follows:
• Memorandum of Associations: It is to be signed by a minimum 7 persons for a public
company and by 2 in case of a private company. It must be properly stamped.
• Articles of Association: This document is signed by all those persons who have signed
the Memorandum of Association.
• List of Directors: A list of directors with their names, address and occupation is to be
prepared and filed with the Registrar of Companies.
• Written consent of the Directors: A written consent of the directors that they have agreed
to act as directors has to be filed with the Registrar along with written undertaking to the
effect that they will take qualification shares and will pay for them.
• Notice of the Address of the Registered Office: It is also customary to file the notice of
the address of the company’s registered office at the time of incorporation. It is to be
given within 30 days after the date of incorporation.
c. Certificate of Incorporation: On the registration of Memorandum of Association, Articles
of Association and other documents, the Registrar will issue a certificate known as the
“Certificate of Incorporation”. The issue of this certificate is the evidence of the fact that the
company is incorporated and the requirements of the Company Act have been complied with.
d. Certificate of Commencement of Business: As soon as a private company gets the
certification of incorporation, it can commence its business. A public company can commence
its business only after getting the “Certificate of Commencement of Business”. After the
company gets the certificate of incorporation, a public company issues a prospectus for
inviting the public to subscribe to its share capital. It fixes the minimum subscription. Then it
is required to sell the minimum member of shares mentioned in the prospectus.