Joint Stock Company is a type of business entity that exists since Medieval times and is still used today in some forms. It is a type of company where ownership is divided into shares and which have the right to transfer these shares to other people. The shares are issued to the individuals who put up the amount of money to form the company. When the company is profitable, the shareholders receive payment from the profits.
A Joint Stock Company had its origins around the end of the twelfth century in Venice, Italy. The government there set up the first known realistic trading corporation, the Rialto Bridge Company. Venetian merchants used this organization to control profits from all trades made in the area. This was depicted in the businessman in Masaccio’s painting of 1485, which shows merchants counting their money and preparing for trading.
In 1602, the Dutch East India Company, also known as Verenigde Oost-Indische Compagnie (VOC), became the first large-scale commercial business of its kind. VOC operated in a similar fashion as that of the Rialto Bridges Company, but was much more successful and influential. The company was significant because it issued stocks and its shares were widely traded on the specific stock exchange. This offered the possibility of developing an international corporation with different levels of ownership.
The proliferation of Joint Stock Companies in the eighteenth century was a major factor in the development of a modern economy and made it possible for men and women to obtain a share in the evolving world economy. Even though such shares had a risk factor, for example, actually trading in stock markets, the result of this was that ordinary people could join in on the success of big companies by buying stocks.
The concept of having a Joint Stock Company was rapidly adopted in Europe and followed by many countries in the world. For example, the Bank of England was established in 1694 by William of Orange and is still in operation today. It is the second oldest bank in the world after the Monte Dei Paschi di Siena, which was established in 1472 in Italy. The Joint Stock Companies later evolved in the United States to become Corporation, also known as Inc.
The Joint Stock Company created a surge in innovation as an ambitious business could acquire capital more easily and try to get it listed in the stock markets. This was the incentive for startups to form and bring goods and services to the public. Moreover, it could use the profits from the sale of its stocks to fund research, purchase legal services or pay dividends to its stakeholders as a form of remuneration.
The Joint Stock Companies flourished and generated wealth, however, not without some drawbacks. The most prominent one was the bubble burst that happened in 1637 in the Netherlands. This led to the collapse of the stock market and the investors who had bet on these companies suffered heavy losses.
Unethical Business Practices
The unregulated nature of Joint Stock Companies allowed certain companies to thrive. For example, The South Sea Company of 1720 was shady enterprise. This type of venture also known as a “bubble company” because they issued outrageous promises to the members of the public and lured them into investing with unbelievable returns.
The South Sea Company was initially promoted as a solution for disposing of the national debt, but it implemented unethical business practices in the form of bribes, corruption and fraud. The company failed to deliver the profits and in the end, the losses were too big and made the people poorer and the investors desperate.
Industrial Revolution
The Industrial Revolution changed the way society operated. It lead to the rapid growth of Joint Stock Companies as more money was available. This encouraged factories to replace smaller businesses, though the companies who managed to stay afloat still had a certain degree of control over the industry. This included the power to fix prices and block their competitors.
The government responded to this issue by setting up rules that aimed to regulate unfair business practices. Companies had to provide more information to the public and adhere to standards set by government commissions, such as the Forward Companies Act of 1720.
This legislation limited the entry of unqualified directors who posed a risk to the Stock Companies. It also stipulated that stocks were to be issued only after careful consideration of their quality and the risk involved.
Economy Before WWI
By the beginning of the twentieth century, there were thousands of Joint Stock Companies all over the world which were estimated to represent upwards to a quarter of the global market capitalization. This type of business entity was a symbol of the capitalist world and it was also responsible for the great wealth of nations and people.
At the same time, the Joint Stock Companies generated greed and lack of trust between society, as such entities were managed by a small group of wealthy people often times at the expense of the majority.
The leading world powers so heavily relied on these companies that they caused a worldwide economic crisis which eventually led to the First World War.
Contemporary Companies
The structure of the contemporary Joint Stock Companies is similar to that of the ones established in centuries past. They can be of various types, including limited liability and unlimited liability companies. Where the shareholder’s liability is limited, they are only liable for the debt of the company to the extent of their investment. However, with unlimited liability, the shareholders responsibility is unlimited.
In some countries, the Joint Stock Companies are now a recognized form of government-owned enterprises, such as in the UK, where it is known as a Public Limited Company. Large corporation such as Microsoft, Nike and Nestle are examples of Public Limited Companies controlled by a board of directors.
Advantages of Joint Stock Companies
Joint Stock Companies offer several advantages. The primary benefit is that a Joint Stock Company can issue stocks in exchange for capital, which can be used to fund the operations and expansion of the company. As a result, investing in a Joint Stock Company enables the shareholder to receive dividends if the company is profitable and earns profits.
Moreover, the Joint Stock Companies have the highest creditworthiness rating and can secure large loans even when the company is not profitable. This allows ongoing operations and advances the growth of the company.
Another advantage of the Joint Stock Companies is that they are relatively simple to set up, although they require substantial formalities. In addition, they involve lower administrative costs, which makes them cost-effective.
Disadvantages of a Joint Stock Company
The key disadvantage of a Joint Stock Company is that the executive management and the shareholders of the company can be liable for criminal offences committed during the course of the business operations. This means that individuals can be held personally responsible if their actions are deemed to have breached certain regulations or laws.
Furthermore, Joint Stock Companies are subject to the terms of the Companies Act and the regulations of the Stock Exchange. They also require specialized advice from legal advisors in order to be set up and run properly. This can be burdensome for smaller businesses and will incur additional costs.
Finally, the Joint Stock Companies are subject to increased taxes. The company is taxed as a separate entity and its shareholders also need to pay tax on the respective dividends received.
Conclusion
The Joint Stock Company is a form of business which has been around for centuries. It is a type of company where ownership is divided into shares and the shareholders receive payment from the profits. The Joint Stock Companies offer advantages such as the availability of capital, but they are also subject to disadvantages such as increasing taxes, criminal liability and high start-up costs.
