What Is a Joint-Stock Company? [Definition, Purpose, Features]

What is a joint-stock company? It’s a type of business entity that has been around for centuries and yet it is different from other types of businesses, such as limited liability companies (LLCs) and partnerships.

In this article, we’ll discuss the purpose of such a company, how it is different from an LLC, and the advantages and disadvantages of forming a JSC.

So, What Is a Joint-Stock Company?

A joint stock company by definition is a type of business organization that is owned by shareholders or investors. They own shares in the company, and they may vote on company decisions. Such a company can have many different types of shareholders, including individuals, other businesses, or governments.

In a private JSC company, only a limited number of people are allowed to own shares. This type of company is often family-owned or managed by a small group of people. On the other hand, in public JSCs, anyone can buy and sell shares. These types of companies are usually large corporations that are listed on a stock exchange.

What Is the Purpose of a Joint-Stock Company?

Let’s take a brief look at the history of these companies before we get to their purpose.

One of the first joint-stock enterprises was created in England in 1606. The purpose of this company was to finance a voyage to the East Indies. These companies were popular in England because they allowed ordinary people to invest in businesses that would have otherwise been out of their reach. Moreover, most companies as well as the government were reluctant to invest such a huge amount in exploration although they believed in the cause.

This system of selling shares benefited both the joint stock corporation and the ordinary people because companies were able to generate funds with low-risk exposure, while people invested as a good way to reach their financial goals.

In America, the Virginia Company of London was the first known joint-stock enterprise. The company was responsible for establishing a colony that is now known as the state of Virginia. However, the English court ordered the dissolution of this company in 1624, and the investors never really saw any profits!

People at that time had no means of knowing whether their investments would generate profits. While it’s never completely risk-free, today investors can use stock market indicators and various investment tools to ensure that they don’t incur any losses on their investments.

Now let’s come back to the present and take a look at the significance of a joint stock company. The main purpose of such a company is to raise capital by selling shares of ownership in the company. The shares are listed on the stock exchange and if you know how to purchase stocks, you can also invest and earn any future profit share.

Key Takeaways

Difference Between LLC and Joint-Stock Company

Here are a few key differences between the two types of enterprises:

Ownership

In an LLC or limited liability company, ownership is determined by the membership interests. In a multimember LLC, each member owns a percentage of the company that corresponds to their investment although there is no minimum capital. While JSC ownership is fixed by the number of shares each shareholder owns.

Management

An LLC is managed by its members or managers who are elected by the members. A JSC is managed by a board of directors elected by the shareholders. The number of directors is determined by the size of the company.

Taxes

As per the joint stock company definition, they are taxed as corporations. This means that the company pays taxes on its profits and the shareholders pay taxes on the dividend they earn from the company. LLCs are taxed as pass-through entities which means that the profits and losses of the company are passed through to the members who report them on their individual tax returns.

Liability of Owners

The owners of an LLC are protected from personal liability for the debts and obligations of the company. On the other hand, the shareholders of a JSC have unlimited liability for the debt of the company unless the company is incorporated. 

Advantages and Disadvantages of Joint-Stock Companies

Let’s now look at some pros and cons of a JSC:

Pros

• Can Raise Large Sums of Money

A JSC can raise large sums of money by selling shares. It can cover the costs of high-value projects. This is because a JSC can issue more than one type of share, which means that it can sell shares to different investors.

• Can Offer Employees Stock Options

A JSC can offer employees stock options. This means that employees can buy shares and own a stake in the company, which can motivate them to work harder.

• Transferability of Shares

If you know how stocks work, you must know that they’re easily transferable. If we describe a joint stock company, it is made with shares owned by different investors. They can easily sell their shares to other investors if they want to as there are no restrictions.

• Public Confidence

A JSC often has more public confidence than a private company. This is because a JSC is required to maintain financial disclosure, which gives investors more confidence in the company.

Cons

• Lack of Control

One disadvantage of a JSC is that shareholders have limited control over the company. This is because the legislation and majority of decisions are handled by the board of directors, and their decisions may not reflect the views of all shareholders.

• Lack of Privacy

By now we’ve understood what joint stock companies are and what they do, and that they are required to disclose their financial information, including their corporate assets, to the public. This means that the private affairs of the company are not confidential. It is an advantage for potential investors but can be a con for people who are already working in the company.

• Delay in Decision Making

A JSC can often take longer to make decisions than a private company. This is because the shareholders need to vote on any major decisions, and there may be disagreements among them.

• Difficulty Information and Registration

Incorporating a joint stock company is quite difficult, meaning that you need to have at least seven shareholders, prepare articles of organization, and financial statements. You also need to register with the Registrar of Companies which can take up some time.

Conclusion

A JSC is a business entity in which shares of the company’s stock can be bought and sold by shareholders. Each shareholder owns a piece of the company and has a claim on the company’s assets and earnings. The biggest goal is to raise capital for the business.