Joint Stock Company

Back to: ECONOMICS SS1

Welcome to class! 

In today’s class, we will be talking about the joint-stock company. Enjoy the class!

At the end of the lesson, you should be able to;

• Appraise the meaning of Joint stock companies
• Distinguish between private and public limited liability companies
• Analyse the characteristics, merits and demerit of each types and their contribution to the economy

Joint Stock Company

A Joint Stock Company could also be called a co-operation but it is popularly known as limited liability companies. The shareholders are the owners. They nominate and vote or select members of the Board of Directors. The weight of the vote of a shareholder is determined by the number of shares he has in the company. The owners are the shareholders who have limited liabilities.

 Characteristics of joint-stock companies

1. Capital is raised by share subscription
2. It is managed and controlled by an elected board of directors
3. The business aims to maximize profits
4. Perpetuity of the business is guaranteed even at the death of a member
5. Liability is limited to the amount of share subscribed by members
6. Ownership is either entirely by private individuals or jointly owned by individuals and government
7. The reward of the business owners is a dividend

Types of joint-stock companies

1. Private limited liability company
2. Public limited liability company

Private limited liability company:

It is owned by a minimum of two and a maximum of fifty shareholders. It must have “limited “at the end of the company `s name reflecting the fact that the owner’s liability is limited to the amount invested in the business

Advantages

1. It has limited liability.
2. It is a separate legal entity.
3. It can easily raise funds from financial institutes.
4. There is continuity.
5. Ownership could be separated from management.

Disadvantages

1. Shares cannot be sold directly to the public
2. Shares are not transferable without the consent of other shareholders
3. Decisions could be delayed
4. Serious disagreement may lead to liquidation
5. Payment of tax affects expansion tendencies

Evaluation

1. What is a joint-stock company?
2. What are the advantages of a private limited liability company?

Public limited liabilities company:

This company has a minimum of seven shareholders with no maximum limit. It has all the attributes of a private company with the addition that it can sell shares to the public through any approved means. They normally add PLC to their names and its shares can be traded in the stock exchange market.

Advantages

1. It has limited liability.
2. It has a separate legal entity.
3. It has an unlimited source of financing.
4. It enjoys economies of large scale production.
5. There is continuity.

Disadvantages

1. It is expensive and legally difficult to establish.
2. The management is very complex.
3. No tax advantages.
4. The decision-making process is very complex.
5. Personal interest decreases.
6. No secrecy, lack of privacy and flexibility.

Difference between a public and private company or their characteristics

PUBLIC	PRIVATE
Has a minimum of 7 owners and no maximum limit	Has a minimum of 2 and a maximum of fifty owners
Can raise capital by selling shares to the public	Cannot raise capital from members of the public and cannot sell shares
It can issue debentures	Does not issue debentures
Capital or shares are freely transferable from one person	Capital cannot be transferred without the consent of other members
It is owned by shareholders but controlled by the Board of Directors	Owned and controlled by those who contributed
Cannot start a business until it obtains both the certificate of incorporation and trading	Can start a business with the only certificate of incorporation as it does not need a certificate of trading.

Evaluation

1. What are limited liability companies?
2. In a tabular form differentiate between private and public limited liability companies

Co-operative societies

A co-operative society may be defined as a self-help voluntary organization in which a group of individuals who have common interest come together to form a business for the benefit of its members. It is set up to assist its members to achieve its desired objectives. It is one of the oldest forms of a business organization existing today.

Characteristics of co-operative societies

1. Its perpetuity is guaranteed even at the death of a member
2. Liability is limited to the amount contributed by each member
3. Its control and management is democratic in nature
4. Sharing of profit is based on patronage
5. It aims to promote the interest and welfare of the members
6. Capital is through voluntary contributions by members

Types of co-operative societies

Generally, six (6) types of co-operatives societies exist namely;

1. Consumers Co-operatives society
2. Producers co-operative society
3. Credit and thrift co-operatives society
4. Retail co-operative society
5. Wholesaler co-operative society
6. Multipurpose co-operative society.

 Consumer Co-operative Society:

Consumer pools their resources together in order to buy goods in large quantity (bulk) from the manufacturers and sell directly to their member at cheaper rates. The profit is shared among members. Depending on the number of goods bought, members have equal rights. Membership is by paying subscription when they join.

Producers Co-operative Society:

These are producers who come together to either produce collectively or market their product jointly. This is common in farming and fishing.

Credit and Thrift Co-operative Society:

This is pooling together of small savings from its members which is normally loaned out to members at a moderate interest rate. Membership of co-operative societies is voluntary.  Anybody can join and decide to leave any time he/she feels like. Everybody has equal rights, you can vote and be voted for. Members elect a committee to run the affairs of the society.

Retailer Co-operative Society:

This is established and managed by a voluntary group of retailers in order to make goods available to members at reduced prices.

 Wholesaler Co-operative Society:

This is made of wholesaler who pools resources together to purchased goods in larger quantities from the producers and sells in small quantities to the retailer.

Multipurpose Co-operative Society:

This is a co-operative society movement, which combines the functions of all other co-operative society.

Evaluation

1. Define a co-operative society.
2. List the types of a co-operative society.

Advantages

1. Encouragement of saving habits among members
2. The running of the affairs of the society is democratic.
3. Members have loyalty to the co-operative
4. There is better and easy access to loans by members
5. Prices of goods are cheaper to improve members standard of living
6. Education of their members is enhanced
7. Small scale producer benefits from economies of scale.

Disadvantages

1. A high rate of embezzlement and mismanagement of funds
2. Denial of individual initiatives
3. Indiscriminate enrollment of membership
4. Evasion of tax
5. Nonchalant attitude by co-operative members
6. It has no goods of its own brand

Evaluation

1. Describe different types of co-operative.
2. List the disadvantages of co-operatives

Shares, bonds and debentures

Shares

A share is a unit of capital measured by a sum of money which is an individual portion of the company’s capital owned by a shareholder. The owner of a share in a joint-stock company is called a shareholder.  Two major categories of share are:

Ordinary shares:

It is also called ‘Equity Shares’ are the shareholders who are the real owners of the business. An ordinary share is sub-divided into two:

• Deferred or Founder Share– is the shareholder who is entitled to the remainder of the profit after all other shareholders have been paid.
• Preferred Ordinary Share– is the shareholder who has preference over other classes of ordinary shareholders

Preference shares:

They are the types of the shareholder which have priority in terms of dividend payment and repayment of capital in the event of liquidation or winding up of the business. Sub-divisions of preference share are as follows:

• Cumulative Preference Share– has priority in the sharing of dividend over others and entitled to collect arrears of dividend.
• Participating Preference Share– the shareholder is entitled to a further percentage of dividend apart from their fixed dividend
• Redeemable Preference Share– the shareholder has prior claims to dividend before all other preference shareholders. The owners of the business can buy this share back after sometimes
• Non – Cumulative Preference Share – the dividend does not accumulate from one year to another. Where a company fails to pay a dividend in a particular year, no dividend will be paid to the shareholder for that year nor will it be carried forward.
• Non – Participating Preference Share – the shareholder is not entitled to further dividend after the ordinary shareholders have been paid

 Bond

A bond is an interest-bearing or discounted government or corporate security that obliges the issuers to pay the bondholder on a specified sum of money annually at a specific intervals and to repay the principal amount of the loan at maturity. Bondholders have an IOU from the issuer but no corporate ownership privileges as shareholders. In other words, bonds are certificate of indebtedness

Showing the amount the issuer owes the bondholder. Types of bonds are:

• Bearer/registered bond
• Secured bond
• Convertible bond.

Debenture

A debenture is an instrument or a loan certificate for raising a long – term loan from the public by a limited liability company. A debenture is a debt and a debenture holder is not a co-owner of the business but a creditor. He receives a fixed rate of interest on his capital whether the company is making a profit or not. His money is repaid at maturity, at an agreed date. If the business fails, he receives back his capital before the shareholders. So, by taking debentures a firm can raise capital externally. Types of debenture are as follows:

1. Mortgage debenture – is a debenture which is issued on the security of the company’s property or fixed assets
2. Floating debenture – is a debenture which is not attached to the security of any company’s asset or property

Evaluation

1. What is a debenture?
2. State types of bond

Reading assignment

Amplified and Simplified Economics for SSS by Femi Longe Chapter 9 Pages 108-118

General evaluation

1. State five features of a public limited liability company.
2. List four disadvantages of a private limited company.1
3. a. Define co-operative societies.      b. Mention its types
4. Write short notes on;

• Limited liability
• Legal entity.
• Shares

 

In our next class, we will be talking about Public Enterprises.  We hope you enjoyed the class.

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