What Is a Joint-Stock Company?

The modern corporation has its origins in the joint-stock company. A joint-stock company is a business owned by its investors, with each investor owning a share based on the amount of stock purchased.

Joint-stock companies are created in order to finance endeavors that are too expensive for an individual or even a government to fund. The owners of a joint-stock company expect to share in its profits.

Historically, investors in joint-stock companies could have unlimited liability, meaning that a shareholder's personal property could be seized to pay off company debts.

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Joint-Stock Company

How a Joint-Stock Company Works

Unless the company is incorporated, the shareholders of a joint-stock company have unlimited liability for company debts. The legal process of incorporation, in the U.S., reduces that liability to the face value of stock owned by the shareholder. In Great Britain, the term "limited" has a similar meaning.

The shares of a joint-stock company are transferable. If the joint-stock company is public, its shares are traded on registered stock exchanges. Shares of private joint-stock company stock are transferable between parties, but the transfer process is often limited by agreement, to family members, for example.

Historically, investors in joint-stock companies could have unlimited liability, meaning that a shareholder's personal property could be seized to pay off debts in the event of a company collapse.

A Short History of Joint-Stock Companies

There are records of joint-stock companies being formed in Europe as early as the 13th century. However, they appear to have multiplied beginning in the 16th century, when adventurous investors began speculating about opportunities to be found in the New World.

European exploration of the Americas was largely financed by joint-stock companies. Governments were eager for new territory but were reluctant to take on the enormous cost and risks associated with these ventures.

That led entrepreneurs to devise a business plan. They would sell shares in their ventures to many investors in order to raise money to fund voyages to the New World. The potential for resources to be exploited and trade to be developed was the attraction for many investors. Others wanted to literally stake a claim in the New World and establish new communities that would be free of religious persecution.

In American history, the Virginia Company of London is one of the earliest and most famous joint-stock companies. In 1606, King James I signed a royal charter permitting the company exclusive rights to establish a colony in what is now Virginia. The Virginia Company's business plan was ambitious, ranging from exploiting the region's gold resources (there weren't any) to finding a navigable route to China (they didn't).

After many hardships, the company successfully established the Jamestown colony in Virginia and began to grow and export tobacco. However, in 1624 an English court ordered the company dissolved and converted Virginia into a royal colony. The investors in the Virginia Company never saw a profit.

Joint-Stock Company Versus Public Company

The term joint-stock company is virtually synonymous with a corporation, public company, or just plain company, except for that historic association with unlimited liability. That is, a modern corporation is a joint-stock company that has been incorporated in order to limit shareholder liability.

Each country has its own laws regarding a joint-stock company. These generally include a process to limit liability.

Key Takeaways

  • A joint-stock company is a business owned collectively by its shareholders.
  • Historically, a joint-stock company was not incorporated and thus its shareholders could bear unlimited liability for debts owed by the company.
  • In the U.S., the process of incorporation limits shareholder liability to the face value of their shares.