Joint Stock Company
Concept of Company Business
A company business refers to the commercial activities conducted by an organized legal entity, commonly referred to as a company or corporation, with the primary goal of generating profit through the provision of goods or services. It involves a structured framework that encompasses various functions, such as production, marketing, sales, finance, and management, all working in concert to meet consumer needs while achieving financial success. A company is a separate legal entity from its owners, which provides liability protection for shareholders.
Scholarly definitions of a company business include:
Peter Drucker, a renowned management scholar, defines a business as “an organization that creates and delivers value to customers, shareholders, and society through its products and services.”
According to Frederick W. Taylor, a pioneer in scientific management, a business is “an organized effort for producing and distributing goods and services to fulfill the needs of society profitably.”
Richard M. Hodgetts, a respected business author, defines a business as “an economic system in which goods and services are exchanged for one another or money, on the basis of their perceived worth.”
These definitions collectively emphasize the multifaceted nature of company business, highlighting its role in creating value, meeting societal needs, and pursuing profitability.
Concept of Joint Stock Company
A joint stock company, established under the Company Act, is a legal entity formed by individuals, either singly or in collaboration with others, to conduct business activities. Its distinguishing feature is the provision of share capital, which represents the collective investment of its shareholders. Shareholders purchase shares, thereby becoming partial owners of the company. This structure allows for the pooling of capital from various investors, spreading financial risk, and enabling the company to access significant resources for its operations and growth.
The shareholders in a joint stock company have limited liability, which means their personal assets are safeguarded from the company’s debts and obligations. This protection fosters investment by offering a degree of security to shareholders. Additionally, joint stock companies enjoy perpetual succession, meaning they can continue their existence beyond the lifespan of individual shareholders. These entities are managed by a board of directors elected by shareholders, ensuring proper governance and decision-making. Joint stock companies play a pivotal role in modern economies, promoting entrepreneurship, investment, and economic development while allowing individuals to participate in business ventures without incurring excessive personal risk.
Introduction to Private and Public Company
In the world of business, companies can be categorized into various types, two of the most common being Private and Public Companies. These classifications are essential for students studying in Grade 11 in Nepal to grasp as they provide valuable insights into how businesses are structured and operated. Let’s delve into the distinctions between these two types of companies.
A private company, often referred to as a privately held company, is a legal business entity that is owned, operated, and controlled by a select group of individuals, families, or a single person. In a private company, ownership is typically restricted to a limited number of shareholders, and its shares are not traded on public stock exchanges. This type of company is characterized by a more intimate ownership structure and a higher degree of privacy compared to public companies. Private companies are often smaller in scale, and they may rely on personal investments, loans, or funding from a small group of investors to finance their operations and expansion.
Scholarly definitions of a private company include:
According to the International Financial Reporting Standards (IFRS), a private company is “an entity that is not a public company.”
Scholar Robert A. Day defines a private company as “an organization that is owned by a small number of individuals or families and whose shares are not traded publicly.”
The American Institute of Certified Public Accountants (AICPA) describes a private company as “one that does not have securities traded on a public exchange.”
Private companies play a significant role in various industries, often contributing to economic growth and innovation while enjoying a greater degree of confidentiality and autonomy compared to their publicly traded counterparts.
In Nepal, a private company is defined and regulated primarily under the Companies Act, 2006 (third amendment in 2019) and its subsequent amendments. A private company in Nepal is characterized by the following key features:
Ownership and Shareholders: A private company in Nepal can be owned by a minimum of one shareholder and a maximum of fifty shareholders. These shareholders can be individuals or other legal entities.
Limited Liability: Shareholders in a private company have limited liability, which means their personal assets are generally protected from the company’s debts and liabilities. They are only liable for the amount they have invested in the company.
Minimum Capital Requirement: The Companies Act, of 2006, mandates a minimum authorized capital requirement, but it is relatively low. This requirement can be met by the shareholders’ contributions.
Share Transfer: Shares of a private company in Nepal can be transferred, but often with restrictions set in the company’s Articles of Association. Share transfers among existing shareholders are usually subject to pre-emption rights, meaning existing shareholders have the first opportunity to purchase shares being sold.
Disclosure and Reporting: Private companies in Nepal are required to maintain proper accounting records, hold annual general meetings, and file annual financial statements with the Company Registrar’s Office. However, the level of disclosure is generally lower than that of public companies.
Public Offering: Private companies cannot issue shares to the public or list their shares on stock exchanges. They operate as closely held entities.
Compliance with the Companies Act, of 2006, and other relevant regulations is crucial for the establishment and operation of a private company in Nepal. Consulting legal professionals or the Company Registrar’s Office is advisable to ensure full compliance with all necessary legal and regulatory requirements.
A public company, often referred to as a publicly traded company or a corporation, is a type of business entity whose ownership is widely distributed among a large number of shareholders, and its shares are publicly traded on stock exchanges. This means that individuals, institutional investors, and the general public can buy and sell shares of the company, making it a highly liquid investment. Public companies are subject to stringent regulatory requirements and transparency standards to protect the interests of shareholders and the investing public. They often have a diverse ownership base, including individual and institutional investors, and are known for their size, scale, and ability to access significant amounts of capital through the issuance of shares.
Scholarly definitions of a public company include:
According to economist and scholar Alfred Marshall, a public company is “a firm whose shares are sold to the general public, which may include shares that are traded on a stock exchange.”
The American economist and Nobel laureate Paul Samuelson defined a public company as “an incorporated firm whose ownership is divided into publicly traded shares of stock, each share representing a proportional interest in the firm’s net assets and profits.”
In corporate finance, scholar Eugene F. Brigham described a public company as “a corporation whose shares of stock are traded on a public stock exchange, making them available for purchase by anyone in the investing public.”
These definitions collectively emphasize the widespread ownership, accessibility of shares to the public, and the regulatory scrutiny that are characteristic of public companies, distinguishing them from privately held businesses.
In Nepal, a public company is defined and regulated primarily under the Companies Act, 2006 (third amendment in 2019) and its subsequent amendments. A public company in Nepal is characterized by the following key features:
Minimum Shareholders: A public company must have a minimum of seven shareholders to be incorporated. There is no upper limit on the number of shareholders.
Limited Liability: Shareholders in a public company have limited liability, meaning their personal assets are generally protected from the company’s debts and liabilities. They are liable only up to the amount they have invested in the company.
Minimum Capital Requirement: The Companies Act, 2006, mandates a minimum authorized and paid-up capital requirement for public companies. The specific amount may be prescribed by the government or regulatory authorities.
Share Transfer: Shares of a public company in Nepal can be freely traded on the stock exchange, and there are no restrictions on their transfer. This allows for easy liquidity of shares.
Disclosure and Reporting: Public companies in Nepal are subject to more rigorous disclosure and reporting requirements compared to private companies. They must maintain proper accounting records, hold regular general meetings, and file detailed annual financial statements with the Company Registrar’s Office and the Securities Board of Nepal (SEBON).
Public Offering: Public companies can issue shares to the public through Initial Public Offerings (IPOs) and can list their shares on stock exchanges, allowing them to raise capital from a wide range of investors.
Compliance with the Companies Act, 2006, and regulations set forth by the Securities Board of Nepal (SEBON) is essential for the establishment and operation of a public company in Nepal. Legal counsel and coordination with regulatory authorities are advisable to ensure full compliance with all necessary legal and regulatory requirements.
Characteristics of Joint Stock Company (Company Business):
Important characteristics of a joint stock company based on the concept and definitions are:
- Legal personality: A joint stock company is a legal entity separate from its shareholders. This means that the company can own property, enter into contracts, and sue or be sued in its own name.
- Perpetual succession: A joint stock company is a perpetual entity, which means that it continues to exist even if some of its shareholders die or sell their shares.
- Limited liability: The shareholders of a joint stock company are only liable for the debts of the company up to the amount of their investment. This means that if the company goes bankrupt, the shareholder’s personal assets are not at risk.
- Establishment: A joint stock company is established by a group of people who subscribe to its Memorandum of Association and Articles of Association. These documents set out the company’s name, purpose, and structure.
- Management by representatives: The management of a joint stock company is entrusted to a board of directors, who are elected by the shareholders. The board of directors is responsible for the overall management of the company, including setting its strategy and appointing its officers.
- Transferability of shares: The shares of a joint stock company are freely transferable, which means that they can be bought and sold by shareholders. This allows shareholders to exit their investment in the company easily.
- Common seal: A joint stock company has a common seal, which is a stamp that is used to authenticate its documents.
- Relation with shareholders: The shareholders of a joint stock company are the owners of the company. They have the right to elect the board of directors and to receive dividends on their shares.
- Publication of financial statements: A joint stock company is required to publish its financial statements annually. This allows shareholders to assess the company’s performance and to make informed decisions about their investment.
- Collection of capital: A joint stock company is required to collect capital from its shareholders. This capital is used to finance the company’s operations and to grow its business.
These are the key characteristics of a joint stock company. They distinguish it from other types of business entities, such as sole proprietorships and partnerships.
Advantages of Joint Stock Company
Here are some reasons (Advantages) for starting a Company Business:
Types of Joint Stock Company
Companies can be classified into various types based on different criteria. Here’s an overview of some common types of companies:
Based on Incorporation:
Chartered Company: A chartered company is one that is granted a royal or governmental charter, giving it certain rights, privileges, and responsibilities. These companies often played a significant historical role in colonial trade and exploration.
Statutory Company: A statutory company is incorporated under a specific statute or law passed by the government. These companies are created for specific public purposes and are subject to special regulations.
Registered Company: A registered company is formed and registered under the company law or act of a particular jurisdiction. It’s the most common type of company and can be further categorized into private and public companies.
Based on Liability:
Unlimited Company: In an unlimited company, the liability of the members is not limited. This means that members are personally responsible for the company’s debts and obligations to the full extent of their personal assets.
Limited Company: A limited company offers limited liability to its shareholders, meaning their liability is restricted to the amount they have invested in the company. It can further be divided into two types:
- Company Limited by Shares: Shareholders’ liability is limited to the amount unpaid on their shares.
- Company Limited by Guarantee: Members guarantee to contribute a specific amount in case the company faces financial difficulties.
Based on the Number of Members:
Private Limited Company: A private limited company is characterized by limited liability and restrictions on the transferability of shares. It has a minimum and maximum limit on the number of members, often suitable for smaller businesses.
Public Limited Company: A public limited company has limited liability and can have an unlimited number of shareholders. Its shares are often traded on public stock exchanges, making it accessible to the general public for investment.
Based on Ownership:
Government Company: A government company is one in which the government owns a significant portion of the company’s shares and often has a substantial influence on its operations and management.
Non-Government Company: A non-government company is owned and operated by private individuals, groups, or entities other than the government. It includes various types of privately owned businesses.
Based on Legal Structure:
- Sole Proprietorship: A business owned and operated by a single individual. The owner has unlimited personal liability for the business’s debts.
- Partnership: A business structure where two or more individuals manage and share profits and losses. Partnerships can be general (unlimited liability) or limited (limited liability for some partners).
- Limited Liability Partnership (LLP): A type of partnership where all partners have limited liability, protecting their personal assets from business debts.
- Company (Corporation): A separate legal entity owned by shareholders. Companies can be further categorized into public and private companies.
Based on Purpose and Activities:
- Non-Profit Organization: Operated for a charitable, educational, or social cause, with the primary goal of serving the community rather than making a profit.
- For-Profit Company: Operated with the primary objective of generating profit for its shareholders or owners.
Based on Industry or Sector:
- Manufacturing Company: Engaged in the production of goods.
- Service Company: Provides various services to clients or customers.
- Tech Startup: A company that focuses on innovative technology products or services.
- Financial Institution: Engaged in banking, insurance, or investment services.
These classifications provide a structured way to understand the diverse landscape of companies, each with its unique characteristics and purposes, serving different roles in the business world.
Difference between Private and Public Limited Company
The differences between a Private Limited Company and a Public Limited Company:
|Aspect||Private Limited Company||Public Limited Company|
|Ownership||Owned by a limited number of shareholders, often family, friends, or a small group of investors.||Owned by a wide range of shareholders, including the general public who can buy and sell shares on stock exchanges.|
|Number of Shareholders||Typically has a minimum of 2 and a maximum of 200 shareholders.||Must have a minimum of 7 shareholders. There is no maximum limit on the number of shareholders.|
|Transfer of Shares||Shares are often subject to restrictions on transfer. Consent of existing shareholders may be required.||Shares are freely transferable on stock exchanges, providing liquidity to investors.|
|Disclosure Requirements||Less stringent disclosure requirements. Not required to publish financial statements.||Subject to rigorous disclosure and reporting standards, including the publication of financial statements.|
|Minimum Capital Requirement||No specific minimum capital requirement, but the company must have an authorized and paid-up capital.||Often has a higher minimum authorized and paid-up capital requirement, which may vary by jurisdiction.|
|Initial Public Offering (IPO)||Cannot issue shares to the public through an IPO.||Can issue shares to the public through an IPO, raising capital from a wide range of investors.|
|Regulatory Oversight||Subject to fewer regulatory requirements and less public scrutiny.||Subject to extensive regulatory oversight, including securities laws and stock exchange rules.|
|Board Composition||May have a smaller board of directors, often consisting of shareholders or a select group of individuals.||Typically has a larger board of directors, which may include independent directors to ensure corporate governance.|
|Corporate Governance||Generally less formal corporate governance structure.||Usually has a more formal and structured corporate governance framework.|
|Listing on Stock Exchanges||Cannot list shares on stock exchanges for public trading.||Can list shares on stock exchanges, allowing public trading and investment.|
|Public Image and Reputation||May have a more intimate and localized reputation.||Tends to have a broader public image and may be considered more prestigious.|
|Decision-Making||Decisions can be made relatively faster due to a smaller ownership base.||Decision-making may involve more complex processes and shareholder voting.|
These differences highlight the distinct characteristics and regulatory requirements that set private and public limited companies apart, influencing their structure, operation, and accessibility to investors and the public.
Difference between a Partnership Firm and a Joint Stock Company
Differences between a Partnership Firm and a Joint Stock Company:
|Aspect||Partnership Firm||Joint Stock Company|
|Legal Structure||Unincorporated business structure.||Incorporated legal entity.|
|Ownership||Typically owned and operated by a small group of individuals (partners).||Owned by shareholders who may be widely distributed, including the public.|
|Number of Owners||Partnerships generally have a small number of owners, often 2 to 20 partners.||Can have numerous shareholders, ranging from a few to millions.|
|Liability||Partners have unlimited personal liability for business debts and obligations.||Shareholders have limited liability, and their personal assets are generally protected.|
|Capital||Partners contribute capital to the business based on their agreement.||Capital is raised by issuing shares, allowing for greater access to funds.|
|Transfer of Ownership||Ownership transfer is often restricted and may require the consent of other partners.||Shares can be easily transferred among shareholders, providing liquidity to investments.|
|Management||Managed by the partners themselves, who may share decision-making and responsibilities.||Managed by a board of directors and executives appointed by shareholders.|
|Governance Structure||Less formal governance structure, typically guided by a partnership agreement.||More formalized governance structure, including a board of directors, bylaws, and regulatory compliance.|
|Disclosure and Reporting||Minimal reporting requirements and less public scrutiny.||Subject to extensive reporting and disclosure requirements, including financial statements published for public access.|
|Decision-Making||Decisions are often made collectively among the partners, facilitating quick responses.||Decision-making may involve a larger group, potentially leading to a more structured but sometimes slower process.|
|Legal Formalities||Relatively simple and requires fewer legal formalities to establish and dissolve.||Involves complex legal formalities for incorporation, ongoing compliance, and dissolution.|
|Taxation||Typically, income is taxed at the individual partner level (pass-through taxation).||Subject to corporate income tax, and shareholders may also pay taxes on dividends received.|
|Continuity of Existence||The life of a partnership is often tied to the duration agreed upon by the partners or the departure of a partner.||Enjoys perpetual existence, unaffected by changes in ownership or the departure of shareholders.|
These differences highlight the contrasting characteristics of partnership firms and joint stock companies, including their legal structure, ownership, liability, management, governance, and regulatory requirements. The choice between the two depends on factors like business objectives, ownership preferences, and the need for capital and liability protection.
Registration Process of a Company in Nepal
The registration process for a company in Nepal involves several steps, including legal compliance, documentation, and government approvals. Here’s an overview of the process:
Choose a Business Structure: Decide on the type of company you want to establish, such as a private limited company or a public limited company. Your choice will determine the specific requirements and regulations you need to follow.
Name Reservation: Verify the availability of your chosen company name with the Office of the Company Registrar (OCR). You can check name availability online or in person. Reserve the name if it’s available.
Draft Company Documents: Prepare the necessary company documents, including the Memorandum of Association (MOA) and Articles of Association (AOA). These documents outline the company’s objectives, rules, and regulations.
Collect Required Documents & Submission of Application for Incorporation of Company:
- Begin by preparing the necessary documents, including the Memorandum of Association (MOA) and Articles of Association (AOA).
- Complete application forms provided by the Office of the Company Registrar (OCR).
- Collect other required documents, such as identity proofs, address proofs, and passport-sized photos of promoters and directors.
- Notarize the MOA and AOA to certify them as true copies of the originals.
- Reserve the company name through OCR and ensure it’s available for registration.
- Submit the application, along with all necessary documents, to the OCR.
Submission of Registration Fees: Pay the prescribed registration fees at a designated bank. Ensure you keep the payment receipt as evidence of payment.
Registration of Company:
- The OCR will review your application and the submitted documents.
- If everything is in order and meets the legal requirements, the OCR will proceed with the registration of your company.
- Once registered, the OCR will provide you with a Certificate of Incorporation, indicating the registration number of your company.
Certificate of Commencement:
- In Nepal, a Certificate of Commencement is issued to private companies to confirm that they can begin their business activities.
- You may need to submit additional documents, such as a bank statement and proof of share capital payment, to obtain the Certificate of Commencement.
Obtain a PAN Number: After registration, you’ll need to obtain a Permanent Account Number (PAN) for your company from the Inland Revenue Department (IRD).
Register for VAT: If your company’s turnover exceeds the threshold set by the government, you will need to register for Value Added Tax (VAT) with the IRD.
Open a Bank Account: Open a bank account in the name of your company. You’ll need to provide the Certificate of Incorporation, PAN card, and other required documents to the bank.
Compliance with Local Regulations: Ensure compliance with various local regulations, such as labor laws, environmental regulations, and industry-specific requirements.
Please note that this is a general overview of the registration process, and specific requirements may vary based on the type of company and any recent changes in regulations. It is advisable to consult with legal experts or business consultants familiar with Nepal’s company registration process to ensure a smooth and compliant registration process for your company.
Main Documents of Company in Nepal
Company meetings are an essential aspect of corporate governance and the decision-making process within a company. These meetings provide a forum for key stakeholders, such as shareholders, board members, and management, to come together, discuss matters of importance, and make decisions that affect the company’s direction and operations. There are different types of company meetings, including:
Shareholders’ Meeting (General Meeting):
- Purpose: Shareholders’ meetings are gatherings of the company’s shareholders, where they discuss and vote on significant company matters.
- Agenda: The agenda of a shareholders’ meeting typically includes reports from the board of directors, financial statements, resolutions on dividend distribution, election or removal of directors, and other significant business matters.
- Voting: Shareholders have voting rights based on their shareholdings, and important decisions are made through voting, often by a simple majority.
- Types: Shareholders’ meetings can be categorized into two main types:
Preliminary/First General Meeting (PGM):
- Purpose: The PGM, also known as the First General Meeting, is the initial meeting of the shareholders of a newly incorporated company in some jurisdictions. It is held shortly after the company’s incorporation to address specific matters required by the company’s incorporation documents and regulatory requirements.
- Agenda: The agenda of a PGM typically includes the adoption of the company’s Articles of Association, appointment of the first board of directors, and approval of any initial capital contributions.
- Participants: Shareholders, founders, and initial directors typically attend this meeting.
Annual General Meeting (AGM):
- Purpose: The AGM is held once a year, as mandated by company laws, to provide shareholders with essential information about the company’s performance, elect or re-elect directors, and approve financial statements.
- Agenda: The agenda for an AGM may include:
- Approval of financial statements and annual reports.
- Election or re-election of directors.
- Appointment of auditors.
- Dividend declarations.
- Addressing shareholder queries and concerns.
- Participants: All shareholders are typically invited to attend the AGM. The board of directors, company executives, and auditors may also be present.
Extraordinary General Meeting (EGM) / Special General Meeting (SGM):
- Purpose: EGMs or SGMs are called outside of the regular AGM schedule when specific urgent matters require shareholder approval. These meetings address exceptional situations and are essential for making major corporate decisions.
- Agenda: The agenda of an EGM or SGM is specific to the urgent matters that prompted the meeting. Common agenda items may include:
- Amendments to the company’s Articles of Association.
- Approving mergers, acquisitions, or significant transactions.
- Capital increases or reductions.
- Dissolution or liquidation decisions.
- Other extraordinary business matters.
- Participants: All shareholders are typically invited to attend EGMs or SGMs. Only the specific agenda items are discussed and voted upon during these meetings.
Board of Directors Meeting:
- Regular Board Meetings: These are scheduled meetings of the company’s board of directors, often held monthly or quarterly. Directors discuss and make decisions on strategic planning, financial performance, executive appointments, and other important corporate matters.
- Special Board Meetings: Convened when specific urgent issues require immediate attention, such as approving major transactions or responding to crises.
- Purpose: Board of directors meetings are gatherings of the company’s board members (directors) to discuss and make decisions on corporate matters.
- Frequency: Board meetings are typically held regularly, such as monthly, quarterly, or as needed to address specific issues.
- Agenda: The agenda may include strategic planning, financial performance reviews, executive appointments, compliance matters, and other issues relevant to the company’s governance.
- Decision-Making: The board makes decisions on behalf of the company and its shareholders, including major business strategies, corporate policies, and oversight of management.
Company Meeting (Annual Meeting):
- Purpose: A broader term that can encompass both shareholders’ meetings and board of directors meetings.
- Agenda: It may include a range of topics, including financial updates, strategic discussions, board elections, and reports from various company departments.
- Scope: The scope of a company meeting can vary widely, depending on the type of meeting and the company’s specific needs.
Company meetings are crucial for maintaining transparency, accountability, and good corporate governance. They provide a structured platform for decision-making, collaboration, and communication among key stakeholders, ultimately contributing to the company’s success and adherence to legal and regulatory requirements.
Procedures for Winding-up of a Company
In Nepal, there are various reasons or conditions that may lead to the liquidation of a joint stock company. The two primary reasons are voluntary liquidation and the cancellation of registration by the Company Registrar’s Office. Let’s explore each of these reasons in more detail:
Decision by Shareholders: Voluntary liquidation occurs when the shareholders and the board of directors of the company decide to wind up the company voluntarily. This decision may arise due to various factors, including:
- The company’s financial insolvency, where it cannot meet its debts and obligations.
- The completion of a specific project or business objective for which the company was formed.
- A strategic decision to close down the company for reasons such as a change in business focus or a merger with another entity.
- Shareholders’ agreement to dissolve the company for any other valid reason.
Approval Process: In the case of voluntary liquidation, the company’s shareholders must pass a resolution at a general meeting, typically by way of a special resolution, approving the winding-up of the company. The company will appoint a liquidator who will oversee the liquidation process.
Liquidation Procedure: Once approved, the liquidator takes control of the company’s assets, pays off its debts, and distributes any remaining assets among the shareholders in accordance with the company’s Articles of Association and relevant laws.
Cancellation of Registration by the Company Registrar’s Office:
Non-Compliance: The Company Registrar’s Office (OCR) in Nepal has the authority to cancel the registration of a company if it is found to be in non-compliance with various legal and regulatory requirements. Reasons for cancellation may include:
- Failure to submit annual financial statements and other required documents to the OCR.
- Non-payment of registration fees and penalties.
- Violation of the provisions of the Company Act or other applicable laws.
- Any other breach of statutory requirements.
Notice and Opportunity to Rectify: Generally, the OCR provides notice to the company before taking the step of cancellation. The company may be given an opportunity to rectify the non-compliance issues within a specified period. If the company fails to comply, the OCR may proceed with cancellation.
Consequences: Once the registration of a company is canceled, it ceases to exist as a legal entity. Its assets may be liquidated, and the proceeds may be used to satisfy outstanding debts and obligations to the extent possible.
It’s important for companies in Nepal to adhere to all legal and regulatory requirements to avoid involuntary liquidation by the OCR. Additionally, voluntary liquidation should be carried out in accordance with the law and with the involvement of the company’s shareholders and appointed liquidator. Legal and financial advice is often sought to navigate the complex process of liquidation and ensure compliance with applicable laws.