Understanding large-scale finance and maneuvering the corporate world can be complicated without any baseline knowledge of its groundwork. This is where a joint-stock company comes in, a predecessor to most modern company structures. This article will tell you everything that you need to know about joint-stock companies, from what they are, where they come from, and why they are essential.
Those paying attention to the finance world are used to hearing discussions about IPOs, SPACS, interest rates, etc. Still, the concept of a joint-stock company predates all of these. Brushing up on them can give investors and start-up hopefuls a big leg up in the market.
What is a Joint-Stock Company?
A joint-stock company is at its core a company that splits ownership of the company into stocks that can be bought and sold by investors. When investors own stock in these companies, they hold that percentage of the company and, in theory, receive that percentage of profits.
There are virtually no limits to how owners can move these shares around. They can be inherited, sold, traded, and given away on a whim. They are, from a legal point of view, an owned asset.
Traditionally these joint-stock companies also have an unlimited liability aspect to them. If a shareholder owns 20% of stocks, they will receive 20% of the profits, but they will also be responsible for 20% of the losses. It has evolved over time, but in its purest form, it involves unlimited liability.
Liability is the key term here when discussing joint-stock companies. Though these changes have come about in the United States, giving companies the option of limited liability, joint-stock companies in their purest form still have unlimited liability.
Legality is also an essential element to discuss when talking about joint-stock companies. When a corporation seeks litigation or is sought after for litigation, it is the corporate name that is involved. Whereas when a joint-stock company sees litigation, it is done through an elected officer.
The joint-stock company was first started as a way for founders to both raise capital and reduce the risk for themselves. If there is a significant dip, then that loss is shared amongst all stock owners and does not present as large of a danger.
Structure of a Joint Stock Company
The forefront of a joint-stock company remains its owners and investors. However, it would be wildly challenging to make day-to-day decisions with an ownership pool of that size.
This problem is where the board of directors comes in. The board of directors deals with the actual running of the company. These directors are elected by the stock owners to represent their best interests, thus providing a more experienced form of leadership.
It is important to note that shareholders do not give up all of their power when introducing a board of directors. They can still veto annual budgets and other significant decisions should the need arise.
Joint-Stock Companies Over Time
These companies have significantly changed over time, as has much of the financial sector. A prominent characteristic of these companies was their unlimited liability which held a considerable amount of risk. Albeit this was not as much risk as a company owned entirely by one person or a few individuals.
Governments introduced limited liability to address these concerns. With limited liability, joint-stock companies and their shareholders are responsible for much less of their losses. If the company dips by a million dollars, that loss is not necessarily a burden split amongst the owners. The value of the company simply declines.
This event opened up these joint-stock companies to a more significant number of entrepreneurs that remained hawkish about the risks they presented. More people felt comfortable in investing, and their presence increased and evolved exponentially.
The legal groundwork formed by these joint-stock companies has led the way for such modern concepts as limited liability companies(LLC), publicly traded companies and other modern forms of company structure.
While the joint-stock company in its original form is a rare sight to see in the current market, its successors can be seen far and wide taking over the market. Its influence over a modern corporate structure cannot be overstated, thus securing its importance in the money market.
Downsides of a Joint-Stock Company
- When you take into consideration shareholders, corporate officers, and a board of directors, you get a lot of people that are vying to moderate the direction of a company, and these desires can sometimes conflict.
- The vast differences between varying forms of liability can be looked at as an unnecessary complication.
- A significant negative to starting these companies is the lengthy process of actually creating them. Since they are so highly regulated, the process can be both lengthy and involved.
Joint Stock Company Vs. Public Company
The differential qualities between a joint-stock company and a publicly traded company may seem small initially, but this comes from a long history of change. Publicly traded companies sound a lot like what we have learned about joint-stock companies but less so when considering their evolution.
Joint-stock companies in their purest form are still those companies that have a limited number of owners and thus an increased percentage of ownership and liability amongst owners. Public companies have a much lower amount of liability than their joint-stock counterparts.
This difference is a benefit of all the changes that these companies have seen over the years. At a certain point, the joint-stock company evolved past its original form and became something else. That something else is the publicly traded companies that we see dominating the stock market today.
So what did we learn from all this? Well, that a joint-stock company is essentially the grandfather to most modern corporate structures that we see today. From LLC’s to start-up companies racing to develop and bring an IPO to market, they all have roots in the joint-stock company.
Becoming informed on these aspects of the financial field is crucial. Knowing where it has come from and where it is going can provide a serious edge when considering joint-stock companies.