Business Revision Notes: 1AS.

Business Structure

Economic sectors
Primary, secondary and tertiary sector businesses

Primary Secondary Tertiary

•makes profit on the direct
use of natural resources
•e.g. : Agriculture,
Aquaculture, forestry,
mining and the extraction of
oil and gas
•Firms that manufacture •Firms that provide
annd process products from consumer services and
natural resources other business
•Often require machinery to •e.g. : Transportation,
operate retailling, insurance,
•E.g. : Bakery, clothing, banking, hotels,
construction restaurants,
telecomunications.

Private Sector and public sector

Private Sector

• comprises businesses owned and control by individuals or groups of

individuals

Public Sector

• comprises organisations accountable to and controlled by central or local

government (the state)
There are interlinked, important to the economy and will be determined by market types:

 Mixed Economy : economic resources are owned and control by both private and public
sectors

 Free-market economy : economic resources owned largely by the private sector with very
little state intervention

 Command economy : economic resources owned, planned and controlled by the state

- Trend shows that most countries are moving from command economies to mixed or free-
market economies to encourage investment to their economies
- Significant goods and services tend to remain government controlled such as police, public
law, education services]
- Selling off of government is called Privatization
- Although some services cannot privatized such as street lighting…
 Privatization
o Selling state-owned and controlled business organization to investors in the private
sector
o The main argument from privatization supporters is that business enterprises use
resources more efficiently than public sector business because they will be driven by
profit motive.

Private
business
setor

Limited
Sole Trader Partnerships Cooperatives
companies

Private (Ltd) Public (Plc.)

Figure. The private sector – legal structure hierarchy

Legal Structures
Sole Trader

- A business in which one person provides the permanent finance

- Full control and full profit
- Unlimited Liability – the owners personal possession and property can be taken to
pay for the debts off the company
- Common sole trader examples : hairdressers, builders, retail shops, etc..

Partnership

- A business formed by two or more people to carry on business together, with shared
capital investment, usually shared responsibilities
- They are formed in order to overcome some of the drawbacks
- Business debts and errors are felt by all partners
- Often unlimited liability, some limited liability in the UK
- Common form of business in some professions such as law and accountancy

Limited Companies

- Ownership of company is divided into small units called shares

- Shares can be bought and sold on the stock market
- People can obtain the complete control by purchasing more than 50% of the shares
- People who own large blocks of shares usually become directors of the business
- Limited Liability :The only liability a shareholder has is the amount he or she
invested
- Risk is transferred from investors to creditors
- Company is viewed as a person; therefore can be sue
- Managers and owners are responsible if they act unethically
- The company will continue to operate despite the death of the owner/ directors
- Limited Liability can be divide into 2 areas such as :
private limited companies and public limited companies
Private Limited Companies
- The word “Ltd” tells us that the business has this legal form
- small firms can gain protection when the owner(s) create a private limited company
- a small- to medium sized business that is owned by shareholders
- often members of the same family
- cannot sell shares to the general public
- They can sell shares only with the agreement of the other shareholders
Public Limited Companies
- They can be recognized by the use of ‘plc’ or ‘inc’
- Most common form of legal organization for really large businesses
- Have access to substantial amounts of funds for expansion
- Has the legal right to sell shares to the public
- Share prices are quoted on the stock market
- Easy to buy and sell shares however, very easy to lose ownership of the business too
- Shareholders appoint the board of directors
- Conflict between the board of directors and shareholders due to long and short term
goal
Short-termism: only interest in short term gains.

Cooperatives
- Various business working together
- All members can contribute to the running of the business, sharing workload,
responsibilities and decision-making
- All members have one vote at important meetings
- Profits are shared equally among members
- Common in agriculture and retailing
- Can be complicated and time-consuming
- The potential drawbacks include poor management skills
- Capital shortages because shares can’t be sell to the general public
- Can benefit economies of scales as they often buy in bulk [large quantity]

 Franchises
- A business that uses the name, logo and trading systems of an existing
successful business
- Not a form of legal structure – but a legal contract
- Franchises are a rapidly expanding form of business operation
- Famous franchise companies (multi-national business) are : McDonald, Burger
King, The body shop, L'occitane….

Why would an entrepreneur want to use the name, style and products of another
firm?

- There’s fewer chances of new business failing as an established brand and

product are being used
- Advice, training offered by the franchiser
- The franchiser pay for the national advertisement
  Joint Ventures
- Two or more businesses agree to work closely together on a particular project
and create a separate business division to do so
- They are not merger, but they can lead to mergers
- Cost and risked are shared
- Different companies might have different strengths and experiences
- Increased access to different markets
- Conflicting management styles, errors and mistakes
- Failure of one partner may put the whole project at risk
 Holding Company
- Not different legal form of business organization
- A business organization that owns and controls a number of separate
business, but does not unite them into unified company

 Public – Private Partnerships (PPP)

(Public limited companies are in the private sector of industry – but public
corporations are NOT)
- A business enterprise owned and controlled by the state –also known as
nationalized industry
- There are two main types of PPP:
 Government funded: government provides most of the funding but it is
managed by the private sector to maximize the efficiency
 Private-sector funded: government or state managed. Private sector
funded but the government can lease the premises or repay the amount.
Once it has lease the premise, it can take the ownership.

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Legal Formalities for setting up a business:

In the UK you need:

1. Memorandum of Association : states the name of the company, the address of

the head office , maximum share capital, declared aims of the business
2. Articles of Association : covers the internal workings and control of the business
such as names of the directors and procedures to be followed at meetings will be
detailed

Successful filling of these documents will be followed by the issuing of a certificate of

incorporation.
 Sole Trader (advantages and disadvantages)

Advantages Disadvantages
 Owner keeps all profits  Unlimited liability
 Owner maintain full control  Knowledge and skills are limited

 Easy to set up – no legal formalities  Difficult to raise additional capital

 Lack of continuity
 Business is develop upon sole
trader’s skills or interest  Intense competition, responsibility on the
sole trader
Ability to raise finance:
 Capital invests came from personal capital,100% net income made from the business,
Mortgage loan.

Partnership (advantages and disadvantages)

Advantages Disadvantages
 Each partner may specialize in
 Unlimited liability for all partners ( with
different areas of business
some exception)
management
 Shared decision making  Profits are shared
 Additional capital injected by each
 Lack of continuity
partner
 Business losses shared between the
 Partner may disagree on decisions
partners
 Greater privacy and fewer legal  Not possible to raise capital from selling
formalities than companies shares
Ability to raise finance:
 additional capital investment injected by each partner ,Bank borrowing ,in some countries,
silent partners may request limited liability as they are not involved…

Concept of limited liability and its importance

 The only liability –or potential loss- a shareholder has if the company fails is
the amount invested in the company, not the total wealth of the shareholder.
 This has two important effect on investors :
1. People are prepared to provide finance to enable companies to expand
2. The greater risk of the company failing to pay its debt is now transferred
from investors to creditors ( those suppliers/lenders who have not been
paid) creditors ,as a result, are very interested in both checking whether
the word ‘limited’ appears in the business name and examining the
company’s account for signs of potential future weakness.
Private Limited Company (advantages and disadvantages)

Advantages
 shareholders have limited liability
 Separate legal personality
Disadvantages
 You can only buy or sell shares with the
permission of all the others shareholders
 Legal costs to set up can be significant in
some countries

 Continuity in the event of the death  Annually, companies must file their annual
financial report to the Companies House
 Original owner is still often able to (less secrecy)
retain control
 Able to raise capital from sale of
 As more owners join the business, the
shares to family, friends and
existing shareholders start to lose control
employees
Ability to raise finance:
 Long term bank loan
 Sale of shares to family, friends or employees

Public Limited Company (advantages and disadvantages)

Advantages
 Limited liability
 Separate legal identity
 Continuity
 Ease of buying and selling of shares
for shareholders – this encourages
investment in plcs
 Access to substantial capital source
Ability to raise finance:
 They can have access to substantial capital sources due to the ability to issue a prospectus
to the public and to offer shares for sale (called a flotation)
Disadvantages
 Anyone could be a shareholder so it may be
possible for rich buyer to buy all of the
shares and become the new owner of the
company [This is refer as hostile
takeover]
 Stock exchange has standards which pulic
companies must meet in order to be listed.
If companies no longer achieve these
standards, they may be removed from the
stock exchange
 As ownership becomes more diluted,
control over business is lost. It is possible
even for other shareholders to vote against
the original owner off the board of directors
(Divorce of ownership from control)
 Annual Financial reports are available to all
shareholders and members of the public.
Secrecy is reduced. Even the competition
may easily obtain these reports.