A joint-stock company is a type of company that is granted legal personality status from the moment it is established, and is commonly used for running businesses. The company’s share capital consists of the total contributions of its shareholders. Shares may be subject to public trading, providing an incentive to investors, who are needed for further business development. At the moment the company is formed, the shareholders may declare it to be a close company, meaning that shares can be transferred to any person but the current shareholders must have first refusal. At the moment of incorporation, shares may be issued in a number of different forms, including bearer stock, registered stock or preference stock.
Functions of a joint-stock company
The ultimate goal of all companies is to run a business and generate profit. A joint-stock company is a useful company type for attracting investors and additional funding, while in return the investor is given shares granting the right to receive dividends. Frequently, joint-stock companies grow into large corporations with significant capital. They are most commonly found in the financial services sector — credit institutions, banks, insurance companies and other payment and financial institutions are very often joint-stock companies. These businesses obviously require financial stability and plenty of available funds in case of necessity.
Advantages and disadvantages of a joint-stock company
The advantage of this kind of company formation relates to liability thresholds. As a general principle, shareholders in a joint-stock company are liable only up to the value of their contribution to the company. So, if the company becomes insolvent, the creditors cannot seek compensation or require damages from the shareholders personally. Conversely, the company is not liable for its shareholders` debts. The strict line between the shareholders` and the company`s liabilities is based on the principle of the legal person.
Another advantage is the ability to raise the necessary funds for starting up the business. At the startup stage, it can be difficult for a company to obtain the initial capital. However, when a few business partners make an investment to achieve a single goal, the business startup plans are likely to be more realistic. Meanwhile, common investment is directly related to common profit-sharing. So if the company makes a profit, dividends should be paid proportionally to each shareholder.
The functions and competence of a company management board is governed by the applicable commercial law and the company’s articles of association. A joint-stock company usually involves a two-level supervisory board, and while this helps control decision making in the daily course of business and avoid mistakes, a complicated management structure may impair the speed of decision making at times when a quick reaction is necessary.
If you plan on setting up a business in the form of a joint-stock company, we strongly recommend that you consult us first. We can provide you with full, detailed information regarding tax planning options and the most efficient corporate structure for your business.
Types of joint-stock company
Joint-stock companies can be public as well as private. Private companies are companies that belong to private persons, regardless of whether they have one shareholder or many. In a private company, stock can be transferred to anyone the current shareholder chooses, and usually shares are transferred under the terms of a share purchase agreement. Shareholder status grants the right to participate actively in the business and in the decision-making process.
Public companies do not necessary belong to the government or another state institution. A public joint-stock company is a company whose shares can be freely traded on the open market through a stock exchange, and so the list of shareholders is not fixed and can be changed in a flexible manner. One of the leading stock exchanges is called NASDAQ. A stock exchange operates as an intermediary and publishes information regarding the stock’s value. When a public company requires more funds, it may issue additional shares and offer them for trade. Accordingly, more funds will be invested into the company. Anyone can track the stock’s value on a public website, and this provides an objective indicator of the company`s financial status. For instance, if the company is not profitable and is likely to run into difficulties, the stock value will drop.
public company can also be used to refer to a company that belongs to the government or is fully or partially controlled by a public institution. This classification is based on the source of the company’s funds. Frequently, companies that provide public services such as heating, water, sewerage and public transport are established in the form of joint-stock companies, and such companies belong to the local municipality. In some cases, 51% of a public joint-stock company’s shares belong to the government and the remaining stock is offered for public trading on the stock exchange.
Shareholders of a joint-stock company
The shareholders of a joint-stock company can be individuals as well as other companies, such as limited liability companies or other joint-stock companies, partnerships or a combination. There is usually no upper limit on the number of shareholders. The corporate structure may involve subsidiary and parent companies based in different jurisdictions, e.g. shareholders might be based in low-tax countries or the joint-stock company may open a subsidiary in an offshore jurisdiction. To illustrate, a company based in the United States might open a joint-stock company in Latvia. Nowadays, in the vast majority of developed countries there are no restrictions on the nationality of shareholders. Free movement of capital and business is one of the fundamental principles of the European Union, which means that EU citizens may set up a company in any of the EU member states under the same conditions as nationals of the country concerned.
Joint-stock company management
A joint-stock company is governed by the company board, whose activities are supervised by the council. Usually, the council consists of at least three members, whereas the company board needs only one member. Shareholders may appoint a company management board to take care of daily business. The shareholders themselves are not required to actively participate in the running of the business and this can be delegated to the company directors. All decisions regarding company structure and other vital aspects such as profit-sharing, dividends and company development fall under the competence of the shareholders’ meeting.
Joint-stock companies vs limited liability companies
Comparing the joint-stock company to the limited liability company, we find that the main difference relates to the requirements of the company formation procedure and those affecting the management structure. The minimum equity capital is usually higher for a joint-stock company, and therefore a limited liability company is more suitable for a small-scale business. Consequently, joint-stock companies possess more funds than limited liability companies, which entails more tightly regulated company management. For example, in some European countries a joint-stock company requires a council to act as a supervisory body over the company board; however, a limited liability company may operate without a council and management responsibility lies entirely with the company board. In some jurisdictions, the law might stipulate a minimum or maximum number of board members. However, the tax regime is usually the same for both types of company, as are the accounting requirements.
A limited liability company cannot be established in the form of a public company, since its shares cannot be traded on the open market. Both types of company can be converted into the other under a reorganisation process. Any fundamental changes in the company, such as changes to the articles of association, an increase or decrease in equity capital, the appointment of a company board, the approval of the financial year, profit-sharing or payable dividends or the dissolution or closure of the business, fall exclusively under the competence of the shareholders’ meeting, and decisions should be made by majority vote.
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Incorporating a joint-stock company
Company formation is usually an easy process where the potential business owners agree to running the business in a certain form under a common business name. Mutual consent is required to establish a company management structure, define the key areas of business and agree on each shareholder’s contribution to the company.
The list may vary depending on the jurisdiction, but generally the following documents are required for company incorporation:
- Memorandum of association
- Articles of association
- Proof of contribution to the company`s equity capital
- List of shareholders
- List of board members
- Declaration of legal address
We can offer you a full-package solution for a joint-stock company formation in any country worldwide. What’s more, if your business requires any additional licenses or permissions, we will notify you and find a satisfactory solution.
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Most popular jurisdictions for joint stock company opening
We can offer our customers joint stock company opening services in numerous jurisdictions, however, some offer more favourable corporate legislation than others. Our lawyers advise considering following jurisdictions for the joint-stock incorporation.