What Is a Joint-Stock Company?
The joint-stock company is a predecessor to the modern corporation. 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.
- A joint-stock company is a business owned collectively by its shareholders, who can buy or sell shares to one another.
- Joint-stock companies are the ancestors of the modern corporation, although there are legal differences.
- 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.
Understanding Joint-Stock Companies
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.
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.
Joint-Stock Company vs. Public Company
The term joint-stock company is virtually synonymous with a corporation, public company, or just plain company, except for a historical 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.
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 costs 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 to dissolve and converted Virginia into a royal colony. The investors in the Virginia Company never saw a profit.
Why Were Joint Stock Companies Important in U.S. History?
Joint-stock companies played a major role in funding the settlement of the original colonies. These companies could raise money from many investors, without exposing any investor to excessive risk. This allowed the companies to raise enough resources to launch successful settlements in the new world. One famous example was the Virginia Company of London, which funded the settlement at Jamestown.
What Was the Advantage of Joint Stock Companies?
Joint-stock companies can raise a large amount of capital by issuing shares, rather than relying on a single investor. This made them a practical investment vehicle for colonial ventures that were prohibitively expensive for any single financier. Moreover, the introduction of tradeable shares added an element of liquidity, since investors could realize gains without waiting for the venture to conclude.
What Was the Most Famous Joint-Stock company?
Perhaps the most famous joint-stock company was the British East India Company, which was formed to trade with India and Asia. Over the course of its 250-year history, the EIC effectively controlled the colonization and exploitation of India and other overseas territories.
The Bottom Line
Joint-stock companies are collectively owned by shareholders. Some existed as early as the 13th century. While, historically, they left shareholders open to unlimited liability, incorporation law has limited liability for shareholders. In the U.S., it was limited to the face value of their shares.