Study Guide and Exercises for Corporate Finance

Author: Chief Editor: Wang Jian et al
Publisher:
Publish Date: 2003-06-01
Features: Excerpt: General Introduction Chapter Modern Enterprise System and Its Business Environment
[Learning Objectives and Requirements] Through the study of this chapter, students should understand the characteristics of the modern enterprise system, the business environment of modern enterprises, and the relationship between corporate capital movement and social capital movement.
[Key Points and Difficulties] The key points of this chapter are the characteristics of the modern enterprise system and the business environment of modern enterprises; the difficulties lie in the characteristics of corporate capital movement and social capital movement, as well as their interrelationships.
[Basic Learning Content]
1. Formation and Characteristics of the Modern Enterprise System
(1) Formation of the Modern Enterprise System Under the conditions of a market economy, the enterprise system is continuously evolving. It has generally gone through a process from "individual proprietorship enterprises—partnership enterprises—modern enterprises." The basic characteristics of an individual proprietorship enterprise (also known as a sole proprietorship or personal proprietorship enterprise) are: the owner invests personally to establish the business, directly manages it, enjoys all the business profits, and bears full responsibility for the business debts. In the event of insolvency, the owner must use their personal assets to compensate. Its limitations are: small scale, limited financing, unlimited liability for the owner, high risk, and limited business lifespan. The basic characteristics of a partnership enterprise are: a business jointly managed by two or more individuals, where partners share business profits and jointly bear losses. Partners may operate the business individually or collectively, but all partners bear unlimited liability for debts. Its limitations include: dispersed authority, slow decision-making, difficulty in financing, and limited business lifespan. One of the key markers of the modern enterprise system (the evolution of traditional companies into modern corporations) is the separation of owners (investors) from managers (managers), with the management of the business being handled by a new class of entrepreneurs (business experts).
(2) Legal Property System and Governance Structure of Modern Companies
1. Legal Property System of Modern Companies The legal property of a modern company is formed by the capital invested by shareholders. Once it is established, it becomes completely independent, and the company's profits and losses are reflected in the growth and decline of its legal property. Although the legal property ultimately belongs to the shareholders, there are the following distinctions between the company's legal property and shareholders' property:
(1) There is a clear boundary between the company's legal property and the shareholders' property other than their capital contributions.
(2) The company bears civil liability with its legal property. If the company goes bankrupt, it has no connection with the shareholders' other personal assets.
(3) Shareholders cannot directly control the capital they have invested in the company in their personal capacity but can only participate in the distribution of company property as a member of the legal organization through certain organizational procedures.
2. Governance Structure of Modern Companies With the development of the company system, the separation of owners and managers has made it even more necessary to improve the governance structure. This ensures that high-level managers, as business experts, can operate freely while maintaining the ultimate control of the owners over the managers.