Joint Stock Company: Types, Formation and Choosing a Form

Meaning and features of a company

A company is a voluntary association of persons formed for some common purpose, registered under the Companies Act, 2013. It is an artificial person with a separate legal existence, perpetual succession and, usually, limited liability. Its capital is divided into small units called shares.

• Artificial person: created by law; acts through people (directors).
• Separate legal entity: it can own property, borrow, sue and be sued in its own name.
• Formation: needs many documents and legal steps.
• Perpetual succession: death, exit or insolvency of members does not affect it.
• Control: by an elected Board of Directors; shareholders do not run daily work.
• Limited liability: members lose at most the unpaid amount on their shares.
• Common seal: earlier its official signature; now optional (since 2015).
• Risk bearing: the company as a whole bears the risk, shared by many shareholders.

Merits and limitations of a company

Merits

• Limited liability: encourages people to invest.
• Transfer of interest: shares can be sold easily (in a public company).
• Perpetual existence.
• Scope for expansion: huge capital from many investors and easy bank loans.
• Professional management: it can hire experts.

Limitations

• Complexity in formation: many documents, time and cost.
• Lack of secrecy: accounts and reports must be shared.
• Impersonal work environment: owners, managers and workers rarely meet.
• Numerous regulations: audits, meetings, filings.
• Delay in decision making: matters pass through levels and the board.
• Oligarchic management: in practice a few directors control it.
• Conflict in interests: shareholders, directors, workers and lenders may want different things.

Private company, public company and one person company

A private company that has no restriction in its articles, or that stops following private-company conditions, is treated as a public company.

Stages in the formation of a company

1. Promotion: a promoter spots a business opportunity, studies whether it can work, chooses a name (checked with the Registrar of Companies), fixes the signatories to the Memorandum, and appoints experts like bankers, auditors and lawyers. He prepares the key documents.
2. Incorporation: an application is filed online with the Registrar of Companies (ROC) with the documents and fees. If satisfied, the ROC issues the Certificate of Incorporation, the birth certificate of the company, with a Corporate Identity Number (CIN). The company legally exists from that date.
3. Capital subscription: a public company raises money from the public by issuing a prospectus (or files a statement in lieu of prospectus if it raises money privately). It must receive at least the minimum subscription (90% of the issue) or return the money. A private company skips this stage.
4. Commencement of business: before it starts business or borrows, a company with share capital must file a declaration with the ROC that every subscriber has paid for his shares (within 180 days of incorporation).

Key documents

Memorandum of Association (MoA)

The main document, the company's charter. It sets the limits of what the company can do. Its clauses:

1. Name clause: name of the company.
2. Registered office clause: the state where its office is.
3. Objects clause: the purpose for which it is formed. It cannot legally do anything outside this.
4. Liability clause: members' liability is limited.
5. Capital clause: the maximum capital it can raise (authorised capital).
6. Association (subscription) clause: the signers agree to form the company and take shares.

Articles of Association (AoA)

The rules for internal management: meetings, voting, directors, dividends, transfer of shares. They work within the MoA and cannot go against it.

Other documents

• Consent of the proposed directors.
• Agreement with the proposed managing director, if any.
• Declaration that all legal requirements have been met.
• Proof of registered office and identity of subscribers and directors.
• Prospectus or statement in lieu of prospectus (at the capital subscription stage).

Choosing a form of business organisation

There is no single best form. Choose after checking these factors:

• Cost and ease of setting up: sole proprietorship is cheapest and easiest; a company is costliest.
• Liability: owners wanting to protect their homes prefer a company or cooperative (limited liability).
• Continuity: long projects need perpetual existence (company, cooperative).
• Management ability: if many skills are needed, partnership or company.
• Capital needed: small shop → sole trader; medium → partnership; large factory → company.
• Degree of control: full control → sole proprietorship; shared control → partnership; control separate from ownership → company.
• Nature of business: personal service (tailor, salon) suits sole trader; large-scale manufacturing suits a company.

Try it

In the last 3D step, set the sliders for (a) a tea stall, (b) a CA firm of three friends, (c) a steel plant. Write the form suggested for each and one reason.

Key formulas and definitions

• Private: 2–200 members, 2 directors; Public: 7+ members, 3 directors; OPC: 1 member, 1 director
• Stages: Promotion → Incorporation → Capital subscription → Commencement of business
• Minimum subscription = 90% of the issue size

Worked examples

Common mistakes

• Saying a company ends when its owner dies. It has perpetual succession.
• Mixing up MoA and AoA: MoA = what the company may do (objects, powers); AoA = how it runs inside.
• Thinking a private company must raise capital from the public. It cannot invite the public at all.
• Writing that a company can start business the day it is incorporated without any declaration. A company with share capital must first file the commencement declaration.