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How did the East India Company change the world?


The Creation of the East India Company
Queen Elizabeth I, depicted here on the occasion of the Spanish Armada's defeat in 1588, chartered the East India Company 12 years later.
Queen Elizabeth I, depicted here on the occasion of the Spanish Armada's defeat in 1588, chartered the East India Company 12 years later.
Hulton Archive/Getty Images

When the British East India Company (EIC) was formed in 1600, there were already other East India Companies operating on behalf of France, the Netherlands, Spain and Portugal. Thanks to the naval route that explorer Vasco da Gama discovered, riches from the Orient were pouring into Europe. With other nations importing fortunes in goods and plunder, Queen Elizabeth decided England should get some, too. So she granted the charter for the East India Company.

Queen Elizabeth used more than just royal decree and coffers (treasury funds) to help merchants and explorers establish trade on behalf of England in the East. The charter she issued created the first official joint-stock corporation. A joint-stock corporation is composed of investors who are granted shares in a company. In return for their initial investments, shareholders are given dividends, or percentages, of the company's profits based on the number of shares the investor holds.

Shares and dividends were not new concepts in England. Twenty years prior to the EIC's charter, Queen Elizabeth was already a major stakeholder in Sir Francis Drake's ship, the Golden Hind. Although it's not certain how much she made from Drake's voyages to the New World, the captain himself made a 5,000 percent return on his initial investment [source: Hartmann].

So a joint-stock corporation like the one Queen Elizabeth formed in the East India Company wasn't much of a financial leap. But it was the first of its kind, and following the establishment of the EIC, its Dutch, French and other competitors followed suit. But granting charter to the EIC wasn't the only part of the prototype for modern corporations that Queen Elizabeth devised.

Under the auspices of her royal authority, Elizabeth also limited the liability of the EIC's investors -- including hers. This made the company the world's first limited liability corporation (abbreviated as LLC in the United States and Ltd. in the United Kingdom). Under an LLC, the investors in a corporation are granted protection from losing any more money than their initial investments in the venture. If the company goes under, the investors only lose the amount of money they put into the LLC. The company's outstanding debts aren't divvied up among its investors [source: IRS].

Queen Elizabeth covered any losses or debts owed by the East India Company with the royal coffers; modern LLCs are subject to bankruptcy procedures, where creditors may be forced to take pennies on the dollar or nothing at all if a corporation goes under.

Although it took several decades for the East India Company to become truly profitable, once it did, the company rose to global domination -- both in business and in government. In a symbiotic way, as the company grew in power, so, too, did England. So it's no surprise that during its existence, the company was directly involved in major geopolitical changes: The EIC literally changed the course of history. Two nations, India and the United States, revolted against East India Company rule, which led to the establishment of their current political structures.

Read how the company inadvertently created the United States on the next page.


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