Joint Stock Companies

Conceptual Overview

In its mature form, the joint stock company has four characteristics that distinguish it from other business structures. First, shares in joint stock companies are freely transferable; that is, they can be bought or sold [Page 741]at any time without any restriction. Second, the liability of shareholders (owners) is limited to the amount they have invested. They are not personally responsible for losses or debt incurred by the company. Third, the joint stock company is a distinct legal entity separate from its owners, and it can sue or be sued at law without its owner's private wealth being impacted. Fourth, management is centralized and divorced from ownership. These features made the joint stock framework a more stable and sustainable platform, than the partnership or the trust, for developing large-scale business.

Traditionally, most business was organized as a partnership, which constituted a contract among individuals. It was used in antiquity, developed further in Europe during the Middle Ages, and was then imported into England. In contrast, the trust, which concerned joint use of assets (usually land) by common law proprietors, was of English origin. Trustees controlled these organizations, which had allowed for joint holding and continuous association. Despite its flexible features, the trust did not prove to be the institutional form through which business subsequently developed.

In comparison to the corporation, the partnership had several limitations as noted by Cottrell in 1980 and Harris in 2000. First, the law restricted the number of partners and therefore the size of their personal wealth placed a limit on the amount of capital that the venture could mobilize. As a result, it was difficult to form businesses, like railways, that needed large amounts of capital using this framework. Second, partnership shares were not freely transferable; they could only be sold with the permission of all partners. Third, unlike corporations, partnerships were not immortal; when one partner died, the partnership was dissolved. Fourth, partners were personally liable for debts incurred by the partnership, and they therefore played an active role in the business, which meant that management was not centralized or separate from ownership. (France, however, permitted limited partnerships in which active partners were exposed to unlimited liability while sleeping partners were protected by limited liability.) Fifth, the partnership did not have a separate legal personality. If a suit against a partnership was brought to court, the partners were personally exposed. These features made the partnership a risky and unstable framework.

As noted by Boyce and Ville in 2002, the joint stock company appeared in different countries at different times. In the United States, the federal government did not have jurisdiction over incorporation; rather, individual states assumed this power, the earliest being New York in 1811. By 1860, all states had enacted general incorporation laws. In 1863, France passed laws granting limited liability. Prussia allowed incorporation from 1870, and under German Imperial laws passed in 1884, limited liability privileges were permitted but strictly regulated. Japan passed general incorporation legislation in 1893.

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