Joint-stock Company: Definition, History, and Examples

Joint-stock Company
Joint-stock Company: Definition, History, and Examples

The history of stock markets dates back to Ancient Rome. The stock market’s history is not as clear as it might seem. However, there is evidence that stock trading dates all the way back to ancient Rome, where there are records of shares being traded, as shown by Cicero’s assertion that shareholdings were trading at a greater price at the time of one of his speeches. Many scholars believe stock trading became popular in the early 17th century.

There existed some kind of stock market at this early date because there would need to be a market for shares in order for them to have such a value.

Securities trading did not reappear in Italy, where city-states began issuing tradable government bonds in the late Middle Ages, for several centuries.

The Dutch East India Corporation, the first organization to publicly issue corporate bonds and stock, was the inspiration behind the creation of the Amsterdam Stock Exchange, the first formal stock exchange in the world, in 1602. This was the first example of what we now know as a stock market, complete with shares, dividends, and counsel encouraging patience in holding equities for a long time in order to gain cash, among other things.

A joint-stock company is an organization that is owned collectively by its shareholders. A joint-stock company gets created when it is too expensive for an individual to start the business entirely on his own. Each investor of the joint-stock company owns shares in the company, corresponding to the percentage of stocks purchased. The shares of a joint-stock company are transferable. The stocks of publicly listed joint-stock companies can be traded on stock exchanges. Today’s corporations trace their origins back to joint-stock companies. Joint-stock companies were not incorporated in the past. This implied that the investors had an unlimited liability to company debts. Today, through the incorporation process, each country’s government have limited the shareholders’ liability. 

Joint-stock companies trace their roots back to the 16th century when enthusiastic investors formed joint-stock companies to fund the explorations of the New World. The investors were optimistic about the trading potential of the New World and eager to establish trading relationships. Considering the huge costs and associated risks, governments were not ready to finance the explorations. This led to the creation of joint-stock companies by eager investors. By selling shares in their businesses to many investors, the resources to fund explorations were raised. 

Companies such as the Dutch East India Company, the Virginia Company, and the British East India Company are all examples of joint-stock companies which were created to fund voyages to new territories. Today, well-known examples of joint-stock companies include the Indian Oil Corporation Limited, Reliance Industries Limited, Tata Motors Limited, etc. 

What is a joint-stock company? 

A joint-stock company is a business that is collectively owned by its investors. A joint stock company A joint-stock company is the ancestor of the modern-day corporation. Each investor’s ownership percentage of a joint-stock company is directly proportional to the percentage of stocks he owns. 

The stocks of a joint-stock company can be transferred. For privately held joint-stock companies, the transfer of shares takes place according to the agreement. The shares of a joint-stock company are traded on registered stock exchanges if the company is public. 

In the past, when joint-stock companies were not incorporated, the shareholders had unlimited liability concerning the company’s debts. This meant that the shareholder’s personal property could be used to pay off the company’s debts. 

Today, however, joint-stock companies are incorporated, where the amount of liability the investors have in company debts is limited. 

What is the history of a joint-stock company?

A joint-stock company’s history can be traced back to the 16th and 17th centuries when huge amounts of money were needed to fund exploratory voyages across the globe. Joint-stock companies were created by enthusiastic investors who were hopeful about the new trading opportunities in new territories. These exploratory voyages cost huge amounts of money and involved high amounts of risks, so the governments of various European countries were reluctant to fund the voyages. This led investors to come together and create companies. Shares were sold in the companies to interested investors, and the money was used to fund voyages. The primary attraction for the investors was the possibility of new trading opportunities in newly discovered territories. The investors were also keen to exploit the new territories for raw materials and resources like cotton, spices, and gold. 

Historical examples of joint-stock companies include the Virginia Company, the British East India Company, the Dutch East India Company, etc. These companies were initially given complete rights to establish colonies and exploit them for raw materials by the governing royal families. In most cases, these rights were withdrawn from the companies later, and the occupied territories were transformed into royal colonies. 

How does a joint-stock company work? 

A joint-stock company works as an organization that is jointly owned by all its investors. A joint-stock company’s functioning depends on whether it is a privately held company or a public one. For a privately held joint-stock company, the shares are transferable between parties, according to the agreement. The transfer of shares for a privately held joint-stock company is usually restricted, for example, to the family members of the shareholders. A public joint-stock company, on the other hand, is listed on the stock exchange and the shares are tradable. Every investor who owns even a single share is considered an owner of the joint-stock company. 

The functioning of a joint-stock company also depends on where the company is incorporated. Incorporation refers to the legal process of transforming a company into a corporate legal entity. Incorporation helps limit the shareholder’s liability by separating the firm’s assets from its owners. Investors only face limited liability when an incorporated joint-stock company goes into financial distress. At the same time, the investors face unlimited liability if the company is not incorporated. When a joint-stock company is not incorporated, the personal property and assets of the investors are subject to seizing if the company collapses. 

How to identify if a company is a joint-stock corporation? 

There are certain characteristics that decide whether a company is a joint-stock corporation.

joint-stock corporation
How to Identify If a Company is a Joint-Stock Corporation?

The seven main characteristics which are used to determine if a company is a joint stock corporation are listed below. 

1. The company has limited liability. 

The company will have limited liability if it is a joint-stock corporation. When a company is incorporated to form a corporation, the firm’s assets are separated from the investor’s personal assets. This means that if the company collapses, only the firm’s assets can be seized to pay off the company’s debts. When a joint-stock company is not a corporation, even the investor’s assets can be seized when the company collapses. Limited liability is a key characteristic of incorporation that protects the personal property and assets of the investors. 

2. The company has a perpetual existence. 

The company will have perpetual existence if it is a joint-stock corporation. This means that once the company is created, it can be dissolved only through legal proceedings. Even when the company’s investors change, the company’s existence is not affected in any way when the company is a corporation. 

3. The company has an association of persons. 

The company will have an association of members if it is a joint stock corporation. The minimum number of members in the company’s association depends on whether the company is privately or publicly held. A public corporation can have from seven to an unlimited number of members. On the other hand, a privately held corporation cannot have more than ten members. 

4. The company has a common seal. 

The company will have a common seal if it is a joint-stock corporation. The common seal stands for the company’s signature. Corporations are entities whose actions come into effect through their Board of Directors, and the common seal serves the purpose of standing for the business organization’s signature. Any document that has the common seal, is legally binding. The common seal adds to the authenticity of the company’s documents and makes them authoritative.  

The company will have a separate legal identity when it is a joint-stock corporation. This means the firm will have its own assets separate from its investors. The individual legal identity also implies that the firm can seek legal action against others and be sued by others. The separate legal identity ensures that the investors are not liable for the company.

6. The company has separate ownership and management. 

The company will have separate ownership and management when it is a joint-stock corporation. Having separate ownership and management means that the firm’s operations will be managed by professionals and not by the company’s investors. This is particularly beneficial as the company’s business activities will be managed by a group of professionals with the knowledge and expertise to manage them. Separating ownership and management makes the company more sustainable. 

7. The company has transferability of shares.

The company will have transferability of shares if it is a joint-stock corporation. In a corporation, the company’s investors can transfer their shares to another party or parties without consulting the other shareholders. However, an investor will not be able to transfer his shares without the consent of the other partners if the company is not incorporated. The characteristic of transferability of shares gives more freedom to the investors and adds liquidity to their assets. 

How to start a joint-stock company? 

The four main steps to starting a joint-stock company are listed below. 

start a joint-stock company
How to start a joint-stock company
  1. Promotion

Promotion is the first step to starting a joint-stock company. Promotion includes all the initial planning and organizing activities which take place before a joint-stock company can be created. The organization of resources is a key part of the promotion stage. The promotion stage mainly involves steps such as deciding on a business idea, getting approval for the name of the business, determining the memorandum of association, appointing professionals and taking care of the legal documentation required for starting the company. 

  1. Incorporation 

Incorporation is the second major step in the creation of a joint-stock company. Incorporation refers to the company’s registration process as a separate legal entity. Incorporation involves the separation and declaration of the firm’s assets from those of its investors. Once the incorporation process is complete, it receives a certificate of incorporation. The certificate documents the birth of the company and ensures the company’s perpetual existence. 

  1. Capital subscription 

Capital subscription is the third major step in creating a joint-stock company. Capital subscription involves the process of obtaining the resources required to start the company. A publicly listed joint-stock company must also obtain approval from the regulatory body that oversees securities and exchanges, such as the SEC in the US or the SEBI in India. Public joint-stock companies also require a minimum subscription before the allotment of shares. Privately held joint-stock companies, on the other hand, can start the business as soon as they receive the certificate of incorporation. 

  1. Commencement of the business

The commencement of the business is the last and final stage of creating a joint-stock company. The step involves obtaining the commencement certificate, after which the business can be run. 

Well-known examples of  Indian joint-stock companies include the Indian Oil Corporation Limited, Reliance Industries Limited, Tata Consultancy Services, and Tata Motors Limited. 

By starting a joint-stock company, more capital can be pooled through many investors instead of relying on a single proprietor. Joint-stock companies were thus created to finance ventures which required massive amounts of investments that were beyond the means of a single financier. Investing in a joint-stock company can be profitable depending on the business venture, its functioning and management, and the investor’s investment needs. 

What is an example of a joint-stock company? 

Commonly known examples of joint-stock companies include the Indian Oil Corporation Limited, Reliance Industries Limited, Tata Consultancy Services, and Tata Motors Limited.

example of a joint-stock company
Example of joint-stock companies

These companies are jointly owned by all the company shareholders. All the shareholders are entitled to vote in all company-related decisions. 

Why were joint-stock companies created? 

Joint-stock companies were primarily created to raise funds required to finance ventures requiring huge amounts of capital. Joint-stock companies enabled several investors to pool money by sharing ownership rights. Historically, joint-stock ventures were formed to finance colonial ventures in the New World. Entrepreneurs decided to join together to fund exploratory voyages to new territories, which were too expensive for their country’s governments. The tradability of shares added to the appeal of joint-stock companies.​​ tradability contributes to more liquidity, which is advantageous to the investors of the joint-stock companies.

Is it profitable to invest in a joint-stock company? 

Investing in a joint-stock company can be profitable depending on the company in question, its management and functioning, and the investor’s investment goals and risk tolerance. The main advantage of investing in a joint-stock company is the limited liability and tradability it offers. The investor’s assets are not in danger of being seized if the company collapses. Tradability also allows the investors to buy and sell company shares whenever he desires and adds to the liquidity of the investment. 

What is the difference between a joint-stock company and a holding company? 

A holding company is a business entity that holds other companies’ controlling percentages of stock. A joint-stock company, on the other hand, is a business organization that is jointly owned by all its investors. The two main differences between joint-stock and holding companies are listed below. 

  1. Operation 

Holding companies do not usually sell any products or services. A holding company is like a parent company that oversees the functioning of its subsidiary companies. However, the holding company does not run the day-to-day functioning of the subsidiary company. Joint-stock companies, on the other hand, are companies that conduct business operations themselves. They may sell either products or services. The day-to-day functioning of a joint-stock company is managed by the company’s employees, who have been appointed for the purpose. 

  1. Liability 

Holding companies have limited liability concerning the losses incurred by the subsidiary company.  Joint-stock companies are also liable to pay for all company debts using the firm’s assets in cases of financial distress and collapse.

What is the difference between a joint-stock company and a trust company? 

A trust company is a legal organization that acts on behalf of a person or business. A trust company functions as a custodian of the business, taking care of the management, administration, and asset management. The two main differences between a trusted company and a joint-stock company are listed below. 

  1. Assets 

A joint-stock company has its own assets and liabilities. All the company’s stock is part of the joint-stock company’s assets. Trust companies, on the other hand, have only those assets which are placed under it by the individual or business it acts as a custodian. 

  1. Control 

A joint-stock company has complete control over its functioning. Each investor of the joint-stock company owns a part of the company and has the right to vote regarding all company decisions. On the contrary, trust companies control only what is mentioned in the trust deed. Their control over the functioning of the business or individual is, therefore, limited. 

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