Business structure

Economic sectors

• Identify and explain primary, secondary and tertiary sector businesses

• Identify and explain the public and private sectors

Legal structures

• Explain the main features of different types of legal structure, including ability
to raise finance

• Suggest and justify appropriateness of legal structure: sole trader, partnership,

private limited companies, public limited companies, franchises, co-operatives,
joint ventures

• Discuss the concept of limited liability and its importance

• Discuss the problems resulting from changing from one legal structure to
another

1
Economy – the state of a country or region in terms of the production and
consumption of goods and services, and the supply of money

Economic Sectors

Primary, secondary and tertiary sector businesses

 Primary-sector business activity: firms engaged in farming, fishing, oil

extraction and all other industries that extract natural resources so that
they can be used and processed by other firms.
 Secondary-sector business activity: firms that manufacture and process
products from natural resources, including computers, brewing, baking,
clothes-making and construction.
 Tertiary-sector business activity: firms that provide services to consumers
and other businesses, such as retailing, transport, insurance, banking,
hotels, tourism and telecommunications.

The public and private sectors:

Public sector: comprises organizations accountable to and controlled by central

or local government (state).

Advantages Disadvantages
 Prices are kept under control
and thus everybody can afford
to consume goods/services
 There is less inequality of wealth
 There is no duplication as the
allocation of resources is
centrally planned
 Low level of unemployment as
the government aims to
provide employment to
everybody
 Elimination of waste resulting from
competition between firms
 Consumers cannot choose and
only those goods and services
are produced which are
decided by the government
 Lack of profit motive may lead
to firms being inefficient
 A lot of time and money is
wasted in communicating
instructions from the
government to the firms

2
Public Corporations – businesses enterprise owned and controlled by the state.
They often do not have profit as a main objective.

Advantages
 Managed with social
objectives rather than solely
with profit objectives
 Loss-making services might
still be kept operating if the
social benefit is great enough
 Finance raised mainly from the
government
 Tendency towards inefficiency
due to lack of strict profit
target
 Government may interfere in
business decisions for political
reasons
 Subsidies can encourage
inefficiencies

Private sector: comprises businesses owned and controlled by individuals or

groups of individuals.

Advantages
 A variety of goods and services
produced
 Businesses respond quickly to
changes in consumer demand
 Businesses will innovate due
to profit motive
 There is no taxation
 Harmful effects of the products
may be ignored
 Firms may dominate market
supply of a product
Disadvantages
 Businesses will only produce
profitable goods
 Businesses will only sell
products to customers who
can afford to pay most for
them
 Resources will only be
employed if profitable
 Harmful goods may be
produced if profitable

3
Legal structures of business organisations in the private sector

Unlimited Liability – the owners of the business are held responsible for the
debts of the business, meaning their personal assets are at risk. (linked)
Limited Liability – 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
shareholders (not linked)

Main features of different types of legal structure, including ability to raise

finance

Possible aspects of answering the question:

Which/ liability/ control/ finance/ advantage and disadvantages

Sole trader: a business in which one person provides the permanent finance and,
in return, has full control of the business and is able to keep all of the profits. It
has unlimited liability. The person is the business and the finance are his/her own
savings. (ruled by one person, if the owner dies the business ends, owner keeps
all the profits, has unlimited liability)

Advantages
 Easy to set up – few legal
formalities
 Owner has complete control
 Owner keeps all profits
 Business can be based off of
interests and skills of the
owner, rather than working as
an employee for a larger firm
 Able to choose times and
patterns of working
 Able to establish close
relationships with staff and
customers
Disadvantages
 Unlimited Liability
 Long hours often necessary
 Difficult to raise additional
capital
 Owner is unable to specialise
in interesting areas of the
business as they are
responsible for all aspects of
management
 Can face intense competition
from bigger firms
 Lack of continuity – there is no
separate legal status so when
the owner dies, the business

4
 will end too
Partnership: a business formed by two or more people to carry on a business
together, with shared capital investment and, usually, shared responsibilities.
Finance comes from partners, also unlimited liability. (2 to 20 partners, same
business personality as the business, owners share the same capital investment)

Sleeping Partner – a partner who usually supplies the business with capital,
however they do not have an active role in running the business. These have
limited liability. (a partner who supplies the business but does not have control
over the business)

Deed of Partnership – provides agreement issues, such as voting rights, the

distribution of profits, the management role of each partner and who has the
authority to sign contracts.

Advantages
 Partners may specialise in
different areas of business
management
 Shared decision making
 Additional capital injected by
each partner
 Greater privacy than corporate
organisations
 Easy to set up as less
formalities than limited
companies
 Shared responsibility so
business losses are shared
between the partners
 Limited access to capital when
compared to Limited companies
 Potential for conflict between
partners
Disadvantages
 Lack of continuity – the
partnership will have to be
reformed in the event of a
death of a partner
 Unlimited Liability for all
partners
 Profits are shared
 Not possible to raise capital
from selling shares
 All partners are bound by the
decisions made by any one of
them
 A sole trader, taking on
partners, will lose
independence of decision
making

5
Limited Companies – incorporated business with limited liability, a separate legal
personality and continuity of a business. In setting up, these must register with
the Registrar of Companies at Companies House. To do this they must complete:
CATTegal right to offer shares for sale to the public Finance usually comes from
shareholders. They are often small to medium-sized businesses

Share – a certificate confirming part ownership of a company and entitling the

shareholder owner to dividends and certain shareholder rights
Shareholder – a person or institution owning shares in a limited company
Separate Legal Personality/Identity – the company is recognised in law as having
a legal identity separate from that of its owners

Page 21 ex 2.2

Advantages
 Shareholders have limited
liability
 Separate legal personality
 Continuity in the event of a
shareholder’s death
 Able to raise capital from sale
of shares to family, friends and
employees
 Original owner is still often
able to retain control
Disadvantages
 Legal formalities involved in
establishing the business
 Quite difficult for shareholders
to sell shares
 Capital cannot be raised by
sale of shares to the general
public
 End of year accounts must be
sent to Companies House –
available for public inspection
there

Public limited company: a limited company/ an incorporated business that has

the legal right to, sell shares to the general public. Shares of these companies are
listed on the Stock Exchange (share prices are quoted on the national stock
exchange). Finance comes from shareholders and general public (people who
bought share). They are often large businesses.(shares owned by infinite number
of people)

6
Advantages
 Limited Liability
 Ease of buying and selling of
shares for shareholders
encourages investment
 Separate legal identity
 Access to substantial capital
sources due to the ability to
issue a prospectus to the
public and to offer shares for
sale
 Continuity
 Directors influenced by short-term
objectives of major investors
(Short-termism)
Family-owned Businesses – businesses actively owned and managed by at least
two members of the same family
Advantages
 Commitment/dedication
 Reliability and pride
 Knowledge and Continuity;
training provided from young
age
 Family Conflict
Disadvantages
 Legal formalities in formation
 Cost of business consultants
and financial advisers when
creating such a company
 Risk of takeover due to the
availability of shares
 Legal requirements
concerning disclosure of
information to shareholders
and the public e.g. annual
publication of reports and
accounts
 Share prices subject to
fluctuation – sometimes for
reasons beyond business
control
Disadvantages
 Succession/Continuity
problems
 Informality in setting practices
and procedures
 Traditional/Lack of innovation
7
Appropriateness of legal structure:
For answering exam question: where would it be/ situation

Cooperatives – business organisations owned and controlled by a group of people

to undertake an economic activity for mutual benefit.
Features include;
 all members contribute,
 all members vote,
 Profit is shared equally.

Types of cooperatives
 Consumer Cooperatives – members buy goods in bulk, sell them, and
divide the profits between members
 Worker Cooperatives – workers buy the business and run it; decisions and
profits are shared by the members.
 Producer Cooperatives – producers organise distribution and sale of
products themselves

Advantages
 Good motivation for all
members to work hard as
they will benefit from shared
profits
 Working together to solve
problems and take decisions
 N Members share
responsibilities, decision
making
 Bulk Buying
Disadvantages
 Poor management skills
unless professional managers
are employed .
 Capital shortages because no
sale of shares to the non-
member general public is
allowed
 Slow decision making if all
members are to be consulted
on important issues

8
Franchises – a business that uses the name, logo and trading systems of an
existing successful business; based upon the purchase of a franchise licenser from
the franchiser. Franchise businesses have a lower failure rate than non-franchise
firms.

Advantages
 Fewer chances of new
business failing as an
established brand and product
are being used
 Advice and training offered by
franchiser
 National advertising paid by
franchiser
 Supplies obtained from
established suppliers
 Franchiser agrees not to open
another branch in local area
Disadvantages
 Share of profits or revenue
has to be paid to franchiser
each year
 Initial franchise license fee can
be expensive
 Local promotions may be paid
by franchisee
 No choice of supplies or
suppliers to be used
 Strict rules over pricing and
layout of outlet reduce
owner’s control over their
own business

Joint Ventures – where two or more businesses agree to work closely together on
a particular project and create a separate business division to do so.

Advantages
 Costs and risks of a new
business venture are shared
 Different companies might
have different strengths and
experiences and they
therefore fit well together
 They might have their major
Disadvantages
 Errors and mistakes might lead
to one blaming the other for
mistakes
 The business failure of one of
the partners would put the
whole project at risk
 Styles of management and

9
 markets in different countries
and they could exploit these
with the new product more
effectively than if they both
decided to ‘go it alone’
culture might be so different
that the two teams do not
blend well together

Concept of limited liability and its importance:

Limited liability: the only liability (potential loss) a shareholder has if the
company fails is the amount invested in the company, not the total wealth of the
shareholder.

It is important because this might decide whether or not people would like to
invest your business and your life after bankrupt.

Problems resulting from changing from one legal structure to another

 Unlimited → Ltd. → Plc: lose control; more profit.

 Raise finance; e.g. 50,000 for Plc.
 Legislation documents: e. g. Sell share

10