Joint-stock Company: Definition, History, How it Works, and Types

A joint-stock company, also referred to as a joint-stock corporation, is a form of business entity which permits multiple owners to hold shares of its stock. Joint-stock companies help businesses raise capital by selling shares to investors who then become part-owners. This form of ownership has enabled the growth and expansion of businesses across many industries while contributing significantly to modern capitalism. 

Early examples of joint-stock companies include the English East India Company, established in 1600, and its Dutch equivalent – Vereenigde Oostindische Compagnie (VOC) founded in 1602. Both were granted monopolies on trade with certain Asian regions that allowed European colonization of these territories. 

Joint-stock companies differ from other forms of corporations in that they raise capital by issuing shares to the public and trading on stock exchanges, while privately held corporations do not issue publicly traded shares and LLCs offer more flexible structures with pass-through taxation and membership interests instead of shares.

What exactly is a Joint-stock Company?

Joint-stock companies (JSCs) are business organizations where ownership is divided among transferable shares, with each shareholder’s liability limited by the amount invested in the business. JSCs allow companies to raise capital by selling shares to investors who become part-owners, thus contributing significantly to modern capitalism’s rise and development.

Joint-stock companies often possess legal personalities separate from that of their owners, giving them the ability to enter contracts, sue and be sued, own property independently and own assets on their own behalf. This separation helps protect shareholders from personal liability due to debts incurred by the company.

Investors in a joint-stock company have the power to vote on important decisions, such as electing a board of directors, authorizing major business transactions, or amending bylaws. This body oversees management decisions and makes strategic decisions on behalf of shareholders while day-to-day operations typically are overseen by an executive team led by either a CEO or president. Joint-stock companies could either be private or public entities, with public joint-stock companies issuing shares that are traded on stock exchanges while privately held ones don’t. Public joint-stock companies must adhere to more stringent regulatory and disclosure requirements than their private counterparts.

An individual or entity’s shareholding determines ownership in a joint-stock company. Shareholders could include individuals, institutions or other companies. A company’s ownership structure be complex with multiple shareholders holding different amounts of shares. This allows a wide variety of investors from small individuals to institutional funds such as pension and mutual funds to participate.

Members of a joint stock company include shareholders, executives and managers. Shareholders are the owners of the company who hold shares representing their ownership interests. The Board of Directors are elected by shareholders. The board oversees management decisions and makes strategic decisions on behalf of the business. Executives and managers are headed by the CEO or president, and this group oversees daily operations and implements strategies set forth by the board of directors.

What is the background of a Joint-stock Company?

Joint-stock companies trace back to Europe’s late Middle Ages and early Renaissance period during the 13th and 14th centuries. Their emergence was in response to the need to finance large trade ventures or exploration expeditions which required substantial amounts of capital beyond what individual traders or merchants could provide. Joint-stock companies developed from merchant and trading organizations who pooled resources and shared risks to finance their ventures.

Governments and businessmen later recognized its many benefits and formalized this business structure into legal structures. Joint-stock companies first started in European nations such as England and the Netherlands. Joint-stock companies emerged as an innovative means of financing these ambitious endeavours at the forefront of global trade and exploration in the 16th and 17th centuries.

The joint-stock model began with companies being granted charters by governments. This gives them exclusive trading privileges over specific regions. Companies then issue stocks and bonds to raise capital from a wider pool of investors while shareholders pooled resources together while sharing risks and rewards associated with company ventures.

Joint-stock companies were created primarily due to the need to finance large-scale trade and exploration ventures that required large sums of capital as well as high levels of risk. Joint-stock companies allowed these ambitious endeavours to come to fruition by pooling resources and spreading risk among multiple investors.

Early joint-stock companies such as the English East India Company (established in 1600) and Dutch East India Company (1602) played an essential role in global trade and exploration, colonization efforts, expansion of European influence across Asia, Africa and the Americas, and expansion of European influence into new territories.

How does a Joint-stock Company work?

Joint-stock companies work by issuing shares to raise capital, offering limited liability protection to shareholders. Public joint-stock companies trade their shares on an exchange, making them accessible to a wider range of investors. Ownership in private joint-stock companies tends to be concentrated among fewer shareholders. Shareholders in a joint-stock company enjoy limited liability. This means that their personal assets are only at risk up to the value of their invested capital. This protection encourages investment as investors know that personal assets beyond that amount won’t be at stake should anything go wrong within the company.

Joint-stock companies operate under a system of corporate governance that involves shareholders, a board of directors, executives or managers and employees. Shareholders have the power to cast votes on significant decisions such as electing a board of directors, authorizing major business transactions and amending the bylaws of their company.

Their voting power typically corresponds to how many shares they own. The board oversees management decisions and implements strategies within the company. It appoints executives for performance review. Executives and Managers are led by a CEO or president and this group manages the daily operations of the company and implements strategies laid out by its board of directors.

Joint-stock companies distribute profits to their shareholders as dividends, with each shareholder receiving an amount determined by how many shares they own. Companies choose to retain earnings in order to reinvest in the business or fund future expansion initiatives.

What is the importance of a Joint-stock Company?

Joint-stock companies (JSCs) have played a critical role in modern capitalism and global economic development. Their importance is traced to key aspects, including their capacity to raise capital efficiently, limit shareholders’ liability exposure, maintain ownership separation between ownership and management and facilitate economic growth and innovation.

Joint-stock companies’ ability to raise capital through issuing shares is one of their principal advantages, enabling businesses to finance large projects, expansion plans, research and development initiatives and economic development initiatives with ease. These businesses finance large-scale initiatives as well as expand by increasing production or creating jobs. This influx of cash allows growth in businesses while contributing towards economic development efforts.

Joint-stock company shareholders enjoy limited liability protection. Their personal assets aren’t at risk beyond what was invested in the company. This encourages investors to put money into businesses knowing their losses are limited and foster economic development. Shareholders are independent of their management (executives and board of directors). This separation enables efficient decision-making as well as attracts professional managers with all of the skills and expertise needed to run its business successfully. Having these separate responsibilities leads to improved governance as well as performance. 

Joint-stock companies have also played a critical role in driving economic development and innovation. Joint-stock companies have contributed greatly to advancements in technology, industry, commerce and trade by providing businesses with resources necessary for expansion and product innovation. Their role as financiers of historic ventures like East India Company and Hudson’s Bay Company has had lasting effects on global trade networks as well as market expansion.

What is the purpose of a Joint-stock Company?

Joint-stock companies’ main purpose is to serve as an organizational structure designed to raise capital, manage risks and foster economic development. Joint-stock companies use shares sold to investors as a method for efficiently raising the necessary funds for starting or expanding a business, investing in new projects or conducting research and development activities. Their ability to raise capital efficiently allows these firms to increase growth while driving economic development forward.

Joint-stock companies that feature limited liability protection protect shareholders from personal responsibility for debts and obligations that go beyond their investments and thus encourage investment by decreasing risks for potential investors. They also utilize an ownership structure characterized by shareholders holding shares to facilitate better decision-making, accountability and corporate governance. This arrangement allows joint stocks to recruit professional managers with the knowledge necessary for running an efficient operation.

Joint-stock companies help mitigate risks across many investors, enabling large-scale ventures that might otherwise be too risky or expensive for individual investors or smaller business organizations to undertake on their own. These companies also play a vital role in economic development by providing the resources for businesses to expand, create new products, and explore new markets. This drives advancements in technology, industry, commerce and the creation of jobs and wealth.

What is the use of Joint-stock Company?

The main use of joint-stock companies is their ability to raise capital through issuing shares to investors, making them ideal for businesses that require significant funding for growth, expansion or research and development purposes. Joint-stock companies also enable shareholders to diversify their investment risks by pooling resources and sharing potential gains and losses among them, which allows investors to participate in larger ventures which might otherwise be too risky or expensive for individuals or smaller business organizations to undertake alone.    

Public joint-stock companies have access to public markets by listing their shares on stock exchanges, giving them access to a larger pool of investors. This helps raise additional capital and establish their visibility and credibility within their marketplace. They allow for flexible ownership arrangements by making it possible for investors to easily enter or leave the business as needed, making an entry or exit easy for newcomers or existing investors alike. This ability also attracts a diverse array of investors which contributes to stability and expansion for your company. 

Joint-stock companies have an established system of corporate governance that clearly separates ownership from management. This separation fosters transparency, accountability, and improved decision-making processes which contribute to long-term company success.

They also foster economic development and innovation by providing businesses with resources needed to develop new products, technologies, and services that advance various industries – which ultimately benefits the entire economy. They also often generate employment opportunities that contribute to economic development in their operating areas. This helps ensure a healthier local economy.

What are the Types of Joint-stock Companies?

There are three primary categories of joint-stock companies, chartered companies, registered companies and statutory companies. Their establishment and regulation differ significantly. Below is an in-depth explanation for each.

1. Chartered Company

The term Chartered Company refers to any joint-stock company which operates with its charter granted by a monarch or government. Chartered companies are formed through special charters granted by sovereign or state authorities that outline their rights, privileges and limitations. This serves as the legal structure through which these businesses operate.

Chartered companies were often given exclusive rights to trade with specific regions or countries historically, effectively giving them monopoly status within those areas. Examples include the British East India Company and the Dutch East India Company. Chartered companies are less common today, as most countries now adhere to more standardized systems for company registration.

Chartered companies don’t abide by general incorporation laws or specific legislation for formation, unlike registered and statutory companies. Their operations follow specific terms outlined by their charter which grant them special privileges not granted to other forms of joint stock companies.

2. Registered Company

A registered company is defined as any joint-stock corporation established and governed under general company laws and regulations. Registered companies are established by registering with an applicable government authority. This is typically their country’s registrar of companies or another similar body. They must abide by all general incorporation laws and regulations applicable in their jurisdiction.

Registered companies are subject to specific procedures and meet certain requirements, including filing articles of incorporation, appointing directors and keeping proper records. Ongoing reporting and disclosure obligations exist in order to maintain transparency and accountability.

Registered companies differ from chartered and statutory companies in that they are established and governed under general company laws rather than being subject to any specific charter or legislation, making them one of the more prevalent joint-stock company structures today.

3. Statutory Company

A statutory company is defined as any joint-stock corporation established and operating under specific legislation issued by a government body. Statutory companies are formed by special acts of parliament or legislation which outline their purpose, structure and regulatory framework. Statutory companies usually serve to perform functions for public benefit such as providing essential services or infrastructure.

Statutory companies are companies owned or partially owned by the government that often serve a public services mandate, such as utilities, transportation authorities or central banks. Examples of statutory companies include public utilities, transportation authorities or central banks.

Statutory companies differ from chartered and registered corporations by being created through specific legislation that suits their purpose and objectives, potentially giving them more powers or responsibilities not applicable to other types of joint stock companies.

The three types of joint companies work are similar but have different characteristics and functions. Understanding the difference makes it easier for investors to choose when investing.

What are the Features of a Joint-stock Company?

Joint-stock companies possess unique characteristics that set them apart from other forms of business organizations. Below is a list of these key features with definitions, importance ratings and pros/cons assessments.

1. The company has limited liability. 

Limited liability means that shareholders of a limited liability company are only personally liable for debts and obligations up to their investment amount. This feature protects shareholders’ assets from company liabilities while simultaneously encouraging investments by minimizing risks.

Limited liability encourages entrepreneurialism and investment, providing businesses with more capital for growth and expansion. But limited liability also encourages excessive risk-taking as shareholders feel more comfortable investing in high-risk ventures knowing their personal assets are protected from being lost to negligence lawsuits.

2. The company has a perpetual existence.

Joint-stock companies possess perpetual existence. This means they continue operating regardless of changes to ownership or management. Ensuring the existence of a company provides continuity and stability even after the death, bankruptcy, or withdrawal of shareholders or directors.

Businesses planning and implementing long-term strategies without worry that ownership or management changes might compromise them is the biggest advantage of this feature. The con is that an ongoing business makes dissolving or closing it more challenging if its activities no longer fulfil a viable purpose or are no longer essential.

3. The company has an association of persons. 

A joint-stock company is an association of persons where multiple individuals or entities unite into one business organization. This feature facilitates the pooling of resources, expertise, and capital to enable more efficient and cost-effective business operations.

An inclusive shareholder base brings a variety of perspectives, skills, and experiences that could improve decision-making processes and business results, which is the feature’s advantage. But associations between people often lead to conflicts of interest or differences of opinion regarding business strategies and goals, leading to potential disagreements.

4. The company has a common seal.

Joint stock companies use an official stamp or emblem known as their common seal to authenticate documents and contracts on behalf of their company. The common seal serves as a legal representation of a company and serves to show that documents bearing it have been properly authorized by management.

Utilizing a common seal helps guarantee the validity and authenticity of official company documents and contracts. But the disadvantage is that requiring a common seal creates additional administrative tasks and responsibilities for company management.

5. The company has an independent legal identity.

A joint-stock company has its own separate legal identity from that of its shareholders and directors. This helps companies easily enter into contracts, own property and sue or be sued in their own name. This also provides clarity and protection for shareholders, directors, and other stakeholders when dealing with them. But it sometimes could be more challenging to hold individuals within them accountable for their actions.

6. The company has separate ownership and management.

Joint-stock companies are structured so as to separate ownership (shareholders) and management (executives and board of directors) in order to maximize decision-making, accountability, and corporate governance. This separation ensures that the company remains in professional hands while shareholders focus on fulfilling their investment and oversight responsibilities.

A separate ownership and management structure promotes transparency, accountability and better decision-making within a company. But this feature has a disadvantage too. Splitting ownership from management creates potential conflicts of interest between shareholders and managers or causes misalignments between their goals and those of the company as a whole.

7. The company has transferability of shares.

Joint-stock companies allow shareholders to easily invest or exit as needed. These entities allow investors to enter or leave quickly as desired. Transferable shares allow for an efficient allocation of capital as investors quickly reallocate their resources across different companies or industries.

The transferability of shares provides liquidity in the market and enables investors to diversify their portfolios more easily. But transferable shares sometimes lead to short-term fluctuations in a company’s stock price as investors buy and sell for various reasons unrelated to the fundamental analysis of their company.

Each of these elements contributes to a joint stock company’s distinctive structure and functioning while offering both advantages and disadvantages for shareholders.

How to start a Joint-stock Company?

One could start a joint-stock company by first crafting a comprehensive business plan outlining its objectives, products or services, target market, financial projections and founding team members who will each contribute capital in exchange for shares of ownership. Step one in creating your company is registering it with your local government or business authority, meeting all legal requirements, securing any permits or licenses needed, and meeting any relevant deadlines.

This process often includes selecting an original company name, specifying how many shares will be distributed and nominating a board of directors to oversee management. Then create a comprehensive shareholders’ agreement that clearly outlines each shareholder’s rights and responsibilities as well as procedures for decision-making and dispute resolution.

The next step should be establishing a business bank account and system for managing the company’s finances so as to track income, expenses, and shareholder dividends in an organized fashion.

Why were Joint-stock Companies created?

Joint-stock companies were designed to allow for the pooling and sharing of capital among multiple investors and mitigate any associated risk. Global trade intensified during the Age of Exploration and beyond in the 16th and 17th centuries, and so too did the need for more efficient ways of financing large projects and ventures.

One purpose for the joint-stock companies’ creation was to enable investors to pool resources together and spread financial risks among a greater pool. Joint-stock companies permitted investors to invest in promising businesses without bearing the full burden of potential losses, making joint-stock companies ideal structures for raising significant amounts of capital for large projects like overseas trade, colonization and infrastructure development. Joint-stock companies also offered more professional and efficient management for these enterprises.

One of the earliest and most noteworthy joint-stock companies was the Dutch East India Company (VOC) and later, the British East India Company, both of which played major roles in influencing global trade during colonialism and later, modern capitalism. Their successes helped popularize joint-stock companies as cornerstones of capitalism today.

Why Did Joint-Stock Corporations Matter in American History?

The joint-stock corporation has played an essential role in American history as this form of business organization allowed for pooled resources and risk sharing among investors, which allowed businesses and the economy to grow and flourish. Joint-stock corporations such as the Virginia Company and Massachusetts Bay Company were instrumental in founding early settlements in North America. Both of these joint-stock entities received charters from the British Crown to fund and organize colonization efforts.

This allowed for Jamestown and Massachusetts Bay colonies, which later became hubs of American culture and governance, to flourish. The joint-stock corporation model also allowed companies to raise large amounts of capital quickly for infrastructure projects like railroads, canals, and telegraph lines, expanding American economic development by creating new markets. They supported industries such as steel production, oil extraction, banking and insurance that played key roles in U.S. economic development.

Joint-stock corporations have long been an engine of innovation in the United States. These companies were able to pioneer breakthroughs in fields like communication, transportation and manufacturing. Examples of this are Alexander Graham Bell’s invention of the telephone and Henry Ford’s development of an assembly line assembly process.

They also provided jobs and spurred economic expansion, contributing to the rise of an economically robust middle class in America and paving the way for it to become one of the leading economic powers on a global level. Joint-stock corporations’ growth and power have also had an immense influence on government and public policy in the United States.

Their rise during the Gilded Age spurred antitrust laws like the Sherman Antitrust Act to curb corporate monopolies and promote fair competition. They have played a part in shaping tax policy, labor regulations, and environmental regulations throughout American history.

What are the disadvantages of a Joint-stock Company?

Joint stock companies are advantageous in general. But they also come with drawbacks. Below are seven main disadvantages of the joint stock company.

1. Complexity and Costs of Formation 

Establishing a joint-stock company typically involves more complex processes and higher costs compared to sole proprietorships or partnerships, including legal fees, registration fees, and ongoing compliance expenses.

2. Regulatory Compliance

Joint-stock companies are subject to more stringent reporting and regulation requirements than other business structures, such as regular financial reports. Maintaining corporate records and complying with securities laws if their shares are publicly traded becomes difficult. Fulfilling such requirements takes both time and resources for companies.

3. Loss of Control

The ownership in a company is divided and its shareholders, founders or majority shareholders experience less control. Decision-making power typically rests with the board of directors which causes conflict between shareholders and management.

4. Double Taxation In certain jurisdictions

Joint-stock companies are subject to double taxation. Profits earned are taxed first at the corporate level before their distribution to shareholders is taxed again individually resulting in an increased overall tax burden for both the company and its shareholders.

5. Limited Liability and Moral Hazard

Joint stock companies’ limited liability feature encourages excessive risk-taking by management or shareholders since personal assets aren’t at stake, leading to moral hazard issues where profit overrides ethical considerations or the long-term interests of the company.

6. Potential for Fraud and Mismanagement

Joint-stock companies often present opportunities for fraudulent behavior by directors and executives, leading to high-profile scandals that tarnish the reputation and shareholder value.

7. Short-Term Focus 

The pressure to meet shareholder expectations and deliver consistent returns forces joint-stock companies into adopting an increasingly short-term focus, often at the cost of long-term growth and sustainability.

Joint-stock companies provide advantages, yet also present the disadvantages listed above. Understanding helps investors and shareholders plan accordingly.

What is an example of Joint-stock Companies?

Reliance Industries, the state bank of India and tata motors limited are three examples of joint stock companies.

Reliance Industries Limited (RIL) is an Indian multinational conglomerate headquartered in Mumbai. It is the largest company in India by market capitalization. RIL is involved in a wide range of businesses, including energy, petrochemicals, retail, and telecommunications.

The State Bank of India (SBI) is the largest state-owned bank in India. It is also the largest bank in India by assets and deposits. SBI has a network of over 24,000 branches and 58,000 ATMs across India.

Tata Motors Limited (TML) is an Indian multinational automotive manufacturing company headquartered in Mumbai. It is the largest automobile manufacturer in India. TML produces a wide range of vehicles, including cars, trucks, buses, and sports cars.

What was the first Joint-stock Company?

The first joint-stock company was the Muscovy Company, which was founded in 1551 by a group of English merchants. The company was granted a monopoly on trade with Russia by Queen Mary I. The Muscovy Company was a major success, and it helped to pave the way for the development of other joint-stock companies in the 16th and 17th centuries.

Are there still Joint-stock Companies?

Yes, joint-stock companies still exist and remain an important element in the global economy. Many large and successful businesses use joint-stock companies as organizational vehicles for running their operations. These are known as corporations or limited liability companies (LLCs), depending on which jurisdiction you operate within. Shares could be privately or publicly held and traded on stock exchanges allowing shareholders to buy and sell ownership stakes in the firm – such as Apple Inc., Amazon.com Inc. and The Coca-Cola Company, among many other notable examples.

Joint-stock companies remain popular due to their ability to raise significant capital, protect shareholders from limited liability exposure, and allow for flexibility regarding ownership and management structures. Unfortunately, though, they also come with certain drawbacks, including regulatory compliance concerns, potential control loss issues, and double taxation.

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

Yes, Investing in a joint-stock company could be profitable, but it ultimately depends on various factors, such as the specific company, industry, and overall market conditions.

What is the difference between a Joint-stock Company and a Holding Company?

Below is a detailed table of comparison between a joint stock company and a holding company.

What is the difference between a Joint-stock Company and a Trust Company?

Below is a detailed table of comparison between a joint stock company and a trust company.

What is the difference between a Joint-stock Company and a Public Company?

The main difference between a joint-stock company and a public company lies in the ownership structure and the degree of regulatory compliance. Below is a detailed table of differences. 

Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.