INSTRUCTOR MANUAL
Instructor’s Manual for Principles of Finance
03/21/22 1
, Instructor’s Manual for Principles of Finance
Chapter 2
Corporate Structure and Governance
Lecture Outline
2.1 Business Structures
No matter what form a business takes, one of its first principles is to maximize the firm’s value.
The form the business takes will reflect the nature of the business itself and its life cycle stage.
Typically, a business’s structure evolves with it—perhaps beginning as a sole proprietorship and
growing to be a multinational corporation.
The four most common forms of business organizations are sole proprietorships, partnerships,
corporations, and hybrids (LLCs and LLPs). Although sole proprietorships represent the largest
number of businesses, corporations represent the far larger market value. A sole proprietorship
offers simplicity of decision-making and low organizational and operating costs. Major
drawbacks are unlimited liability to the owner, limited life, and less access to capital.
Partnerships bring greater resources and expertise to the business and also allow some of the
partners to limit their liability when using a general partner/limited partner structure. Of the
two main forms of hybrids, LLPs are used for professional services firms and LLCs by other
forms of businesses. A corporation is separate legal entity with an unlimited life and liability
limited to capital invested. Most corporations entrust the operations of the business to
management, who are responsible to the shareholders/owners.
Market Applications
• A key benefit of the corporation form of business is that the firm raises permanent capital
that is used for its ongoing business. The first issuance of stock with proceeds going to the firm
for ongoing operations was done by the Dutch East India Company (DEIC) in 1603. Instead of
merchant capitalist investors financing individual voyages, shareholders’ capital in the VOC (the
Dutch abbreviation for the DEIC) remained within the company to finance ongoing voyages.
Prior to that, voyages were financed one at a time and investors were repaid their investment
upon successful completion of the venture.
• A more modern example is the corporatization of Wall Street firms in the 1980s. Beginning in
the 1970s, non-US financial institutions were building their presence in the United States,
mostly New York. In order to compete against these large, mostly European, banks, Wall Street
houses began converting from their 100+-year-old partnership structure to corporations. This
allowed them to access more equity capital and grow sufficiently to compete against the large
European firms.
2.2 Relationship between Shareholders and Company Management
Stakeholders vs. shareholders: Perhaps an easy way for students to think of the difference
between shareholders and stakeholders is the mnemonic “shareholders are stakeholders, but
03/21/22 2
Instructor’s Manual for Principles of Finance
03/21/22 1
, Instructor’s Manual for Principles of Finance
Chapter 2
Corporate Structure and Governance
Lecture Outline
2.1 Business Structures
No matter what form a business takes, one of its first principles is to maximize the firm’s value.
The form the business takes will reflect the nature of the business itself and its life cycle stage.
Typically, a business’s structure evolves with it—perhaps beginning as a sole proprietorship and
growing to be a multinational corporation.
The four most common forms of business organizations are sole proprietorships, partnerships,
corporations, and hybrids (LLCs and LLPs). Although sole proprietorships represent the largest
number of businesses, corporations represent the far larger market value. A sole proprietorship
offers simplicity of decision-making and low organizational and operating costs. Major
drawbacks are unlimited liability to the owner, limited life, and less access to capital.
Partnerships bring greater resources and expertise to the business and also allow some of the
partners to limit their liability when using a general partner/limited partner structure. Of the
two main forms of hybrids, LLPs are used for professional services firms and LLCs by other
forms of businesses. A corporation is separate legal entity with an unlimited life and liability
limited to capital invested. Most corporations entrust the operations of the business to
management, who are responsible to the shareholders/owners.
Market Applications
• A key benefit of the corporation form of business is that the firm raises permanent capital
that is used for its ongoing business. The first issuance of stock with proceeds going to the firm
for ongoing operations was done by the Dutch East India Company (DEIC) in 1603. Instead of
merchant capitalist investors financing individual voyages, shareholders’ capital in the VOC (the
Dutch abbreviation for the DEIC) remained within the company to finance ongoing voyages.
Prior to that, voyages were financed one at a time and investors were repaid their investment
upon successful completion of the venture.
• A more modern example is the corporatization of Wall Street firms in the 1980s. Beginning in
the 1970s, non-US financial institutions were building their presence in the United States,
mostly New York. In order to compete against these large, mostly European, banks, Wall Street
houses began converting from their 100+-year-old partnership structure to corporations. This
allowed them to access more equity capital and grow sufficiently to compete against the large
European firms.
2.2 Relationship between Shareholders and Company Management
Stakeholders vs. shareholders: Perhaps an easy way for students to think of the difference
between shareholders and stakeholders is the mnemonic “shareholders are stakeholders, but
03/21/22 2
