styczeń 2023

Advantages and disadvantages of the joint-stock company

10 minut
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A joint-stock company becomes the suitable legal form at a certain level of advancement in doing business.

It can be assumed that this is the highest level of legal organization for an enterprise in Poland, which was created specifically for large-scale ventures that require a lot of financing and involve high risk.

A joint-stock company precisely matches these two needs - first, the management board in a joint-stock company has very limited liability, definitely more limited than in an actual limited liability company. In fact, it can be assumed that it virtually does not have any responsibility for the company's liabilities - except for tax liabilities.

This is a key feature for high-risk ventures.

Secondly, a joint-stock company allows you to raise capital by entering the stock market. But with the ease and many more options for issuing shares, the joint-stock company also allows you to raise capital outside the public stock market, such as through crowdfunding.

Do you already have a big company and even bigger ambitions? Or are you just planning to establish a company starting right away with a lot of capital and a big project?

Or maybe your plans are to go public? Perhaps a joint-stock company is then just the choice for you.

What is a joint-stock company?

So what is a joint-stock company anyway?

A joint-stock company is a capital commercial company with legal personality and relatively high capital. The rules of its operation are described in great detail in the Commercial Companies Code - which can be considered an advantage, since the high level of codification of these rules allows for the implementation of difficult and complex enterprises.

Its organs are the management board, the general meeting of shareholders and the supervisory board (it is mandatory!). Its partners, on the other hand, are shareholders who, in exchange for their contribution, receive the right to a share of dividend, i.e. remuneration from the company's profits, and most often can vote at general meetings on key issues for the company.

Further on in the article I will describe the pros and cons of a joint-stock company, which will also help you find out whether it is a legal form worth considering for your business.

Key advantage of a joint-stock company - no responsibility of the management board for liabilities

Raising a huge capital, implementing large projects or eventually going public - as a rule - involves a lot of risk.

If the management board of a joint-stock company were liable for its unpaid liabilities with its own assets (e.g. in the manner of a limited liability company), there probably wouldn't be many people willing to sit on the board of a joint-stock company implementing, for example, a project worth millions of PLN.

That's why the management board in a joint-stock company is not liable for the company's liabilities - with minor exceptions, but there is no equivalent of Article 299 of the Commercial Code for a joint-stock company in the legislation intended for a joint-stock company.

This means that in case of insolvency of such a company (or simply its failure to pay its debts), the management board does not risk responsibility for these liabilities with its own assets.

This is a key feature of a joint-stock company. It allows for complex projects and ventures where the scale of risk is difficult to assess or hard for an individual to accept.

Issuing shares and raising capital to buy a competing company or similar M&A transactions? A large construction or manufacturing company dependent on a stretched supply chain? Or perhaps simply a stock market debut?

For such and similar ventures, the joint-stock company form will be perfect. But you don't have to plan a billion-dollar venture to make a joint-stock company a good choice.

Any large enterprise with many different factors at play (complex supply chains, a specific market, many employees, etc.) can benefit from the joint-stock company form and thus limit the liability of the company's managers.

Among the main exceptions to liability are tax liabilities. The management board is responsible for these liabilities with its own assets, of course, if the company fails to pay the said liabilities.

Exclusive advantage of joint-stock company - possibility to enter the stock market

A joint-stock company is the only legal form that is allowed to debut on the stock market. No other type of company in Poland is allowed to enter the stock market (at least this is the interpretation of the Warsaw Stock Exchange on the subject).

This is undoubtedly one of the reasons why companies choose to establish joint-stock companies or convert other forms of business into them. The underlying motivation for going public is usually to generate profits, a willingness to abandon investments or, on the contrary, the company's will to raise capital for further large investments.

Public companies are characterized by greater transparency and therefore greater public trust. Presence on the stock market means publicity, the possibility of issuing more shares and the chance to raise funds for further development.

Going public is, of course, associated with a large amount of capital, the necessity to meet further formal conditions, as well as potential fragmentation of shares. This is a complicated process and requires many additional conditions to be met.

However, this is certainly an advantage of a joint-stock company - running a company in another form of business makes it impossible to go public.

Does a joint-stock company have to be on the stock exchange? Of course not, it can also operate completely outside the public exchange.

Raising capital through a joint-stock company - private issue

A joint-stock company is also a suitable form for raising capital through a private issue of shares (and thus not on a stock exchange).

In practice, a joint-stock company can announce (e.g., on the Internet or in the press) that it is issuing shares, and investors can take up these shares, thus paying capital into the company. A joint-stock company will be a good form for organizing crowdinvesting.

Theoretically, the issue can be for any amount, but it should be remembered that after certain thresholds, notification or approval of the issue by the Financial Supervisory Commission is required.

In any case, this is an important advantage of a joint-stock company, giving it an advantage over, for example, a limited liability company. In theory, a limited liability company can also issue new shares and collect investors willing to take them up. However, taking up shares in a limited liability company requires a notarized form, and that makes it quite difficult.

Can you imagine 2500 small investors going to notaries to take up shares worth, say, PLN 500? Technically this is virtually impossible, and the total cost of such an operation will be not much less than the value of the issue. Meanwhile, in a joint-stock company, a documentary form is sufficient for taking up shares, so you can sign up for shares and take them up, for example, via email.

Now, it is necessary to mention a certain novelty - the Simple Joint Stock Company (Polish: PSA) The so-called PSA also allows for easy issuance of shares and their easy acquisition but, unlike the Joint Stock Company - it does not provide for the exclusion of management board’s liability.

Thus, it can be assumed that if it is a small and non-risky issue of shares then a Simple Joint Stock Company will be enough (you can read more here), and if the issue involves a larger business - it is worth thinking about a joint-stock company.

Activities that can only be conducted in the form of a joint-stock company

There are also cases in which the adoption of the form of a joint-stock company will be mandatory. It involves situations where the regulations clearly specify that a certain type of business can only be conducted by a joint-stock company.

The most well-known case will be the operation of a bank - if an entrepreneur wants to open a bank he must do so in the form of a joint-stock company. Also social insurance companies and general pension companies must be managed in the form of a joint-stock company.

The restriction also applies to lending institutions - although here the loophole is somewhat more widely opened, as lending institutions can operate in the form of a limited liability company or a joint stock company.

Shareholder’s liability

One of the most basic, but also most significant advantages of a joint-stock company is its legal subjectivity. Being a legal entity, the company itself incurs liabilities and it is itself liable for them - from the company's assets. This means that shareholders are not liable with their personal assets and are protected against large losses. This corresponds to the essence of a joint-stock company and allows the company to take more risks while protecting itself from the consequences.

Thus, shareholders are only liable up to the amount of their contribution - which can also be high and painful to lose, especially in case of real estate or large cash contributions - but the risk is known and determined in advance.

Shareholders are thus liable with what they bring to the company in exchange for taking up shares. If the company, for example, goes bankrupt and collapses - they will no longer recover their contributions.

Note! The exception in this case is a joint stock company in organization - during this period it is possible for shareholders to be liable from their personal assets.

Different series and types of shares in a joint-stock company

An unquestionable advantage of a joint-stock company is the possibility to issue shares in different series and of different types.

This ensures considerable flexibility, for example, in case of raising capital by a joint-stock company - it is possible to issue shares of different series at the same time, with different preferences - another for institutional investors, another for existing shareholders, and another for small individual investors.

This gives the opportunity to tailor the shares to the expectations of both the investor and the company. For example, a special type of preferred stock involves non-voting shares. Owners of such shares receive higher dividends or priority of satisfaction, or even both privileges, at the expense of losing their vote at the general meeting.

The issuance of non-voting shares can tempt individual investors to invest in a particular joint-stock company - the most important thing for small investors is to ensure maximum profit, so the preference of higher dividends is a tempting prospect. At the same time, small investors are generally not interested in voting at General Meetings - having, for example, 0.01% of shares in a company, the vote of such a person has no value anyway, as these people realize.

On the other hand, a joint-stock company issuing non-voting shares to hundreds or thousands of small investors ensures that they will not meddle in the company's affairs. It also safeguards itself against, for example, a larger entity buying up these shares and thereby taking control of the company (or even increasing its influence over the company).

Other preferences of shares are also possible, such as voting preference shares, when there are, for example, 2 votes per share. In addition, shares issued in different series may have different values and be taken up for different contributions.

So there are quite a few possibilities. The joint-stock company is organized to give as many options and solutions for business as possible.

Disadvantages of a joint-stock company - formalization and costs

How to set up a joint-stock company? It is necessary to start with the fact that the joint-stock company can only be established at a notary’s office. It is not possible to establish it through the S24 system.

Also, many of the activities of a joint stock company, and even the minutes of the shareholders' general meeting, require the form of a notary's deed - which involves regular costs. A joint-stock company also requires full bookkeeping, and financial statements with a mandatory auditor's opinion every year.

In a nutshell, a joint stock company is a highly formalized form of doing business. However, it reflects the intentions for it to be a type of company suitable for larger ventures.

The cost of bookkeeping is also greater than that of running a sole proprietorship or a limited liability company, and this should be taken into account when planning to establish a joint-stock company.

Share capital of a joint-stock company

Share capital in a joint-stock company is also a high entry threshold - the highest among all types of companies, as the minimum capital for a joint-stock company is 100 thousand zloty. Another thing is that before registering the company, it is necessary to pay for the shares at least a quarter of their nominal value.

The share capital of a joint-stock company consists of shares, with the minimum value of one share being no less than 1 grosz.

Contributions made to cover the share capital can be both money and in-kind contributions, such as real estate or an enterprise. It is mandatory in such a case to perform an audit of the value of such contributions by a certified auditor. This is certainly an additional "inconvenience", although - on the other hand - it secures correct determination of share capital in a joint-stock company - and it also serves as a guarantee for creditors, hence it is important that it is not, for example, overstated (uncovered).

Thus, deepened formalisms and costs constitute certain disadvantage from the operational point of view, but can also be an advantage - for example, for potential investors. Mandatory auditing or expert opinions when making an in-kind contribution to a company can build confidence and trust among investors and encourage them to recapitalize the company.

Other disadvantages of a joint-stock company

The joint-stock company also has other features that, judged from the point of view of simplicity or cost of doing business, can be perceived as its disadvantages.

Of the issues not yet mentioned, the requirement for a supervisory board to be elected should be emphasized, regardless of the share capital or the number of shareholders. The process of registering a company is complicated and time-consuming, and can also be costly, especially when in-kind contributions are made.

I would also venture to say that running a joint-stock company forces the hiring of legal, financial and management or accounting specialists. The process of liquidating the company is also complicated.

Certainly, the downside of a joint-stock company is also the fact that it is taxed twice - both as a company and its shareholders - and nobody likes taxes, as we all know, even single ones. Thus, the company's profits are subject to corporate income tax (CIT), and once the dividend is paid, it is subject to personal income tax at 19%.

The taxation rules are therefore identical to those of a limited liability company, there is no difference.

A joint-stock company or a limited liability company?

So is it worth establishing a joint-stock company or converting into it? Maybe it is better to set up a limited liability company?

In my opinion, there is no sensible answer to this question, because these companies are different and their purposes are simply different.

Thus, a joint-stock company is intended for costly and risky ventures, it is a form for companies with a large turnover or ambitions, which care about high transparency. It is certainly more suitable in some sectors than others, but in the hands of those who know how to manage it, it can prove to be a useful tool in unusual fields of operation as well.

Given the large and complex scale of the business, the formal responsibilities involving in a joint-stock company should not bother you - the standard is to outsource their handling to external entities such as law firms.

If you want to learn more about the joint-stock company - write to us, we will be happy to help!

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