Business Activity and

Influences on Businesses
Chapter 3 and 4
Different Forms of Business
 Private Sector Business Public Sector Business

Primary By ownership
Sector Small Business
By Activity

By Size
Secondary Medium
Sector
Types of Business
Business

Tertiary Large Business

By legal form
Sector

Unincorporated Incorporated
Business Business
 Business Sector in terms of ownership

Private Sector Businesses Public Sector Businesses

• Businesses owned by private individuals,
• Businesses owned and controlled by government.
not by government. • The government makes decisions about
• The owner can make their own decisions
what to produce, how to produce, and what
about what to produce, how to produce, what
price should be charged.
price should be charged. • Most businesses are run for public services.
• Most businesses are run for profit making.
• Some goods and services are provided free of charge
• Mainly financed by owners
to customers.
• No political interference
 Sole tradership • mainly financed by taxation
 Partnership • Subject to political interference
 Joint venture
 Private limited company
 Public limited company
 Franchise
 Cooperatives (Social Enterprise)  Public corporation
Legal Form of Business
• Unincorporated
• Businesses which has no separate legal identity from its owner; Everything is to be carried out in
the name of the owner (contract, sue and be sued)
• The owners have unlimited liability (take full responsibility of the debts of the business; in case of
business failing to pay its debts, the owners can be forced to pay the debts with their own money)
• The business would cease as the owner dies
• Tend to be small businesses and owned by one person or small group of people (sole traders and
Partnerships)
• Incorporated
• Business that has a separate legal identity from that of its owner; The business can sue, be sued,
take over or liquidated in its own business name
• The owners have limited liability (they are not personally liable for the debts of the business; in
case of business failing to pay its debts, the owners cannot be forced to pay the debt with their
own money)
• The business would continue to exist if one of the owners die.
• Tend to be Limited companies and they are owned by shareholders
 Legal Form of Business
Unincorporated Businesses
• Not too much legal requirements
• no separate legal identity from its
owner
• owners have unlimited liability
• No continuity if owner dies
• Tend to be small business
• Sole Tradership
• Partnership
Incorporated Businesses
• Too much legal requirements
• separate legal identity from its owner
• owners have limited liability
• Continue to exist if one of owners dies
• Tend to be large business
• Private Limited Company
• Public Limited Company
• Public Corporation (Government)
 Features of Sole Traders/Sole Proprietor
• Business that is owned and controlled by just one person who takes all of
the risks and receives all of the profits, but can employ any number of
people.
• Key features:
• Unincorporated business
• Unlimited liability for the owner
• Not too much legal requirements in setting up
• The owners need to pay income tax on the profit gained
• No continuity when the owner dies
• farmers or fishermen, small manufactures, retailers running small shops, web
design, tutoring, hairdressing, taxi driving, garden maintenance, etc.
 Advantages and Disadvantages of Sole Traders
Advantages
• simple to set up than other types of business
<< there is no legal requirement.
• Be their own-boss >> independent and
complete control over the business >> no need
to consult with other before decision making.
• Flexibility>> the freedom to choose his own
holidays, hours of work
• Can offer a personal service << close contact
with their own customers >> ability to respond
quickly the customers needs and wants.
• The owner can keep all the profits << no need
to share the profits with others >> incentive to
work hard >>
• complete secrecy in business matter << They
don’t have to give financial information to public
>> competitors cannot take advantage on it
Disadvantages
• Owner has unlimited liability >> fully
responsible for any debts of the
business >> high risk for owners
• May struggle to raise finance << limited
sources of finance>> difficulty to
expand the business.
• Too small to exploit economies of
scales << small scale production >> less
competitive with large businesses.
• Too much responsibility for the owner
<< they have no any partners to discuss
and share the business matters >> have
to work very hard and for Long hours.
 Features of Partnership

• Business jointly owned and managed by two or more people.

• Key features:
• Partners contributed capital to the business and share responsibility for running business.
• They also share profit/loss made by the business.
• accountancy, law and dentistry are form of partnership
• Partners have to pay income tax.
• If one partner died, the partnership would end.
• Require deed of partnership: Legal document that states the formal rights of partners.
• How much capital each partner will contribute
• How profit/loss will be shared
• The procedure for ending the partnership
• How much control each partner has
• Rules for taking on new partners and retirement of partner
• Without it, there may be some disagreement on who put most capital and who is entitled
to more of profit.
 Three Types of Partnership
• General Partnership: Partnership where all partners involve in the day-to-
day operation of the business and all have unlimited liability for the debts of
the business
• Limited Partnership: Partnership where some partners have limited liability
status; they are sleeping partners who contribute capital but do not take part
in running the business. However, at least there must be one partner with
unlimited liability.
• Limited Liability Partnership: Partnership where all partners have limited
liability. In 2000, the law changed in the UK so that limited liability
partnership can be formed.
 Advantages and Disadvantages of Partnerships
Advantages
• Easy to set up and run because of no legal
formalities
• The responsibilities can be shared >>
partners can specialize in their area of
expertise >> the benefits of effectiveness • Different partners have different opinions >>
and efficiency.
• More capital can be raised than sole trader
<< more owners >> more easier to expand
the business.
• Financial information is not to be
published >> cost effective/ prevent from
competitors’ exploitation
• Any losses can be shared between partners.
Disadvantages
• Partners have unlimited liability >> If the
business fails to meet its debts, partners are
forced to sell their own properties to pay
business debts.
disagreement and conflict among partners >>
lead to fall out the business/ consulting take
many times >> slow decision making
• Any partner’s decision is legally binding on all
>> If one partner is dishonest, the other
partners could suffer by losing money in the
business.
 Activity 1
Chata is a sole trader. He owns a bakery which supplies bread products and cakes to local
supermarkets and independent retailers. His cakes are very popular. In recent months Chata has had to turn
down orders from existing customers because he is unable to produce enough cakes with the equipment he
has available. Chata was discussing his problems with Juma, an old friend from catering college.

Juma is looking to start his own business making chocolate. He has suggested to Chata that they
go into partnership. Chata has $10,000 to invest in the business, which he says can be used to buy
additional equipment for Chata’s bread and cakes, but also for Juma’s chocolate production.

Discuss the advantages and disadvantages to Chata of entering into partnership with Juma.

11
Limited Companies
• Limited companies are incorporated business jointly owned by shareholders;
they have separate legal identity from their owners.
• Key Features:
• raised capital by selling shares (some stake of ownership).
• The person who buy the shares are shareholders and joint owners of the business.
• The shareholders have limited liability.
• The shareholders have the voting right on significant decisions.
• Shareholders with more shares will have more control.
• Shareholders are subject to capital gains and dividend payments.
• Limited companies pay corporation tax.
Features of Limited Companies
• In case of large companies, all shareholders do not make day-to-day
decisions and running the company.
• In the Annual General Meeting, shareholders have to elect the board of
directors who run the company and directors are accountable to
shareholders; the board is led by a chairperson.
• In some cases, BODs appoints the CEO and management team to run
the company and BODs take the supervisory role, thus CEO reports to
the BODs.
• Shareholders have the voting right on significant decisions at Annual
General Meeting.
• Follow a legal procedure to form the limited companies (e.g. Myanmar
Companies Law 2017 in Myanmar)
Forming a Limited Company
• Must have a minimum of two members (shareholders), but there is no upper limit.
• Memorandum of association and articles of association must be sent to the
Registrar of Companies to form the company limited.
• Memorandum sets out the constitution and gives detail about the company such as
name, address, objectives, nature of activities, amount of capital and numbers of
shares.
• Articles deal with the internal running of the company such as rights of the
shareholders, procedures for appointing directors, director term, timing and
frequency of meetings, arrangement for auditing, procedure for the issuing of
shares.
• After inspecting MOA and AOA, the company registration office would issue
Certificate of incorporation to trade as a limited company.
• Two common types of limited companies are private limited company and public
limited company.
Two Types of Limited Company
• Private Limited companies whose shares • Public Limited companies whose
are sold to only private individuals like shares are sold freely to any person/
family members or closed friend.
organization.
• Key Features:
• Shares can only be transferred privately; • The shares of PLC can be traded on
they can not be advertised for sale. the stock exchange.
• All shareholders must agree on the transfer.
• Shares can not be traded on the stock
• Larger than private limited companies
market. • Business names end in PLC
• Mostly small or medium sized, but small
minority are large • FMI, MTSH, MCB, FPB, TMH, EFR,
• Family business owned by family members Amata are examples of PLC listed on
or close friends
YSX.
• Business names end in Limited or Ltd
• Air Bagan, Peace Myanmar Group, Max
Energy, etc., are examples
 Advantages and Disadvantages of Private Limited Companies
Advantages
• More capital can be raised by selling
shares >> Limited liability status can attract
more investors >> expand more rapidly to
grow the business
• Offer limited liability protection to its
shareholders >> no risk of losing their
personal assets when the business is in
trouble and closed
• Control over ownership >> shareholders
who want to sell shares cannot sell them to
outside buyers >> reduce the risk of take
over by other business
• Continuity of business >> the death or
departure of any shareholder does not
affect the continuity of the business
Disadvantages
• There are significant legal requirements to
set up a limited company >> It costs money
and take time.
• Limited ability to transfer shares << the
shares cannot be sold to anyone else
without the agreement of shareholders >>
makes some people reluctant to invest in
private limited company.
• Cannot raise huge amounts of money like
Public limited company << the company
cannot sell its shares to general public.
Advantages and Disadvantages of PLC
Advantages
• Shareholders have limited liability.
• Very large amount of capital can be
raised << no limit to the number of
shareholders >> rapid expansion might be
possible
• Shares can be bought and sold very
easily >> attractive for potential investors.
• PLCs can exploit economies of scale <<
large scale production and distribution
• May have a very high profile in the media
because of stock listing on the stock
market >> easier to find suppliers and
financiers.
Disadvantages
• Setting up costs can be very expensive and take times
due to its legal formalities.
• More regulatory control to protect the interest of the
shareholders.
• Financial statements has to be published >> the
business’s strength and weakness can be seen by its
competitors
• Selling shares to public is expensive.
• Outsiders can take control by buying 51% of shares <<
no control who can buy the shares
• Managers may take control rather than owners << a
large numbers of shareholders cannot involve in day-to-
day business operation and decision making >> they
can only vote to elect directors who appoint the
management teams for the company.
Public Limited Companies (2 of 2)
• Flotation means the process of offering a company’s shares for sale on the
stock market for the first time
• Going public (selling shares to the public) can be expensive since different costs
are incurred;
• Legal cost: Prospectus must be prepared and examined by lawyers not to present any
misleading information. These must be filed in the Stock Exchange Commission.
• Printing and distribution cost: Thousands of copies of Prospectus must be printed and
circulated.
• Commission on service: The company asks an investment bank to help share application
process.
• Underwriter fees: This is the fees paid to an investment bank who acts as a broker
between the issuing company and the public
• Must have stated minimum capital (GBP 50000 in UK)
 Test your understanding
Which document would be issued to a limited company giving it permission to trade.
A. Memorandum of association C. Certificate of incorporation
B. Articles of association D. Prospectus

Which item of information would be contained in the memorandum of

association?
A. Rights of shareholders C. Price of the shares to be issued
B. Name of the company D. Procedures for appointing shareholders
 Test your understanding
Selling shares to the public for the first time to raise capital for a company is called
A. Flotation C. Joint venture
B. Prospectus D. Venture capital

Which of the following is a disadvantage of a private limited company?

A. Shareholders have limited liability
B. Owners have to share the profits with outsiders
C. It can take time to transfer shares to new owners
D. Control could be lost to outsiders
Features of Franchises

• A franchise is business based on the official use of the brand name, business
ideas and method of an existing successful business.
• Franchisors are owner of the franchise who developed successful business ideas and
allowed other business its brand name and ideas.
• Franchisee is business which pays fees to the franchisor to receive the right to operate.
• This is a popular way for multinational businesses to expand across many
countries. For example, there are very few countries in the world that do not
have a McDonald’s! Most of these are franchised outlets.
• The franchisee may be a sole trader, partnership or incorporated business
organization.
• Franchises suit someone who wants to run a business but does not have their
own business ideas.
Features of Franchises Cont’d
• What does the franchisor offer the franchisee?
• A license to trade under the recognized brand name of the franchisor
• A start-up package (help, advise, essentially equipment, branding materials)
• Training in how to run a business and operate the system
• Materials, equipment and support services
• Marketing support
• An exclusive geographical area
• In return for these services the franchisee has to pay certain fees.
• A one-off start-up fee
• An ongoing fee (usually based on sales)
• Contribution to marketing costs
• Franchisors may make a profit on some of the materials, equipment and
merchandise supplied to franchisee
 Advantages and Disadvantages of Franchises to Franchisor
Advantages Disadvantages
• Fast and cheaper method of growth since • Poor franchisees may damage the brand’s
franchisor do not need to finance all the reputation of the whole business.
outlets.
• Potential profit is shared with franchisee.
• It has the potential to make a lot of
money in the form of franchise fees. • The franchisee can become the competitor
• Reduced financial risk for franchisor in the future; they know the business
because the franchisee takes on debts formula and can make more better version.
and liability of opening a unit under the • Franchisees may get merchandise from
name of the franchise. elsewhere.
• Reduce the stress of hiring and managing
• Cost of support for franchisees may be high.
employees. Franchisees are more
motivated than employees.
• Increase brand awareness due to the
multiple locations of the business.
 Advantages and Disadvantages of Franchises to Franchisee
Advantages
• Less risk of failure >> a well-known product is
being sold >> Franchises come with instant
brand recognition and loyal customer base.
• Back-up support by franchisor to start-up
business; necessary materials, equipment and
merchandise, advise and operation manual and
training for employees and managers.
• Fewer decisions are to be made on prices, store
layout, and product range. These are decided by
franchisor.
• National marketing may be organized by
franchisor >> most of the potential customers
are already familiar with the product.
• The franchisor will already have checked the
quality of suppliers, so the franchisee can get
guaranteed quality supplies.
Disadvantages
• Can be an expensive way to start up a
business; license fees must be paid to
the franchisor and possibly a
percentage of the annual turnover.
• Lack of independence since strict
contracts have to be signed and strict
operating rules are to be applied.
• May be unable to make decisions that
would suit local area.
• The franchisee will still have to pay for
any local promotions they decide to do.
• Profit is shared with the franchisor
who take a percentage of the revenue
or profits made by the franchisee each
year.
Features of Social Enterprises
• Business that has social objective as well as an aim to make a profit which
would be reinvested into the business.
• SEs exist to meet social and environmental needs and make a positive impact in
their community. (create positive social change)
• Not-for-profit or not-profit organizations.
• Their features are;
• Clear social/environmental mission (create jobs for disabled, reduce inequalities, recycle
everywhere possible, eliminate waste and pollution)
• Generate income through trade/donations/funding/grants/ sponsorship/ membership/
crowdfunding campaign
• Most of the profits are reinvested in the business/social mission or in the local community
• Majority controlled in the interest of the social mission
• Accountable and transparent for their actions
 Co-operatives and Charities
• A cooperative is a legal entity owned by a group of people who have
common economic and social needs.
• Charities such as UNICEF, Oxfan, Save the children exist to raise money for
good causes and draw attention to the needs of disadvantaged groups in
society, for example, children, elder people, disable people, etc. Charities
rely mainly on donations for their revenue, however they may organize
fundraising events such as cake sales, sponsored activities, selling greeting
cards, and running charity shops.
 Social Enterprise Examples in Myanmar
• Hla Day handmade products (works with local artisans, disadvantaged groups and
small local business)
• Yangon Bakehouse training café (provide disadvantaged local women with job skills
and experience, life skills training and opportunities for future employment)
• Shwe Sa Bwe training restaurant (provides underprivileged Myanmar youths with
culinary and services courses training)
• Pomelo handmade products (local artisans using locally-sourced materials)
• LinkAge restaurant and art gallery (cooking and service vocational training to Yangon
street children)
• FXB Myanmar handicrafts (provides young people who are at risk from HIV/AIDS and
human trafficking with tailoring, weaving, furniture making, interior decoration, and
metal and wood work)
• Microfinance businesses
• Cooperatives
 Test your understanding
Which of the following is an advantage of sole trader?
A. Limited liability C. Unlimited liability
B. More capital can be raised than a partnership D. Independence for owners

Having a clear social and/or environmental mission is a feature of

which business structure?
A. Franchise C. Social Enterprise
B. Sole trader D. Partnership
 Test your understanding
A fast method of growth is a key advantage for which business structure?
A. Franchisor C. Franchisee
B. Partnership D. Social enterprise

Taking risk in business is a key role of which the following?

A. Accountant C. Company Director
B. Entrepreneur D. Marketing Manager
Choosing the type of business organizations
• it is much easier to set up an unincorporated business than an
incorporated business. This explains why sole traders and
partnerships are the most popular form of business organization in
most countries.
• Private limited companies, and especially public limited companies,
are more complex to set up. They have many more legal controls
than unincorporated businesses; for example they must produce
more detailed financial statements every year.
Choosing the type of business organizations
Most businesses start small and often as a sole trader or partnership.
However, as a business grows, the original owners may decide to
incorporate – become a private or public limited company. They may
decide to do this for a number of reasons, such as:
■ To reduce the legal and financial risk to owners.
■ Separate legal identity also has the benefit of business continuity.
■ The business may want to raise additional capital to invest in growth
plans.
Factors affecting the appropriateness of different
forms of business ownership
• Growth and need for finance: most businesses start as small (sole trader)
and want to grow so they need finance; the only way to get more money is
to change the types of organization.
• Size: Many small businesses are sole traders or partnership. Public limited
companies are much larger with huge amount of assets (physical, financial,
Human resources) and turnover.
• Control: Some owners like independence and complete control of their
business. They should form sole trader.
• Limited Liability: some owners form limited companies to give themselves
more financial protection since sole traders and partners have unlimited
liability.
Factors affecting the appropriateness of different forms
of business ownership
• Types of business activity: services such as plumbing, decorating, gardening
tend to be sole trader business; accountancy, legal services, architecture
design tend to be partnership; small manufacturing, family business tend to
be private limited companies, Large banks, retail chains and manufacturers
are tend to be public limited companies.
• The ways in which a business plans to use its profits: PLC uses to pay
dividend; business that prefers to reinvest a lot of its profits may choose the
form of private limited company.
• Influence of different stakeholders: Leading employees in a private limited
company might discourage the shareholders from going public.
 Objectives and The Types of Organization
• Small sole traders might be happy to make a modest amount of profit – just
enough to fund a comfortable life style. They may not want the responsibility
associated with growth objectives. (profit satisficing)
• Family businesses and other medium-sized private limited companies often
do not wish to go public because they are afraid of losing control to
outsiders. As a result, their growth might be limited and other objectives are
more important.
• Most multinationals want to grow. Their aim is often to get bigger and bigger
so that they can dominate global market. (McDonald’s is example)
 Test your understanding
(1) Which of the following business activities is likely to be operated by a sole trader?
A. Motor car manufacturing C. Banking
B. Chemical processing D. Gardening services

(2) What is the most appropriate form of business for a multinational operator?
A. Partnership
B. Public corporation
C. Public limited company
D. Social enterprise
 Test your understanding
(3) What is an appropriate form of business for a self-employed taxi driver?
A. Multinational C. Sole trader
B. Public limited company D. Cooperative

(4) Which of the following is most likely to affect the appropriateness of

a particular form of business?
A. The rate of inflation in the economy
B. Geographic location
C. The financial risk owners are prepared to take
D. The views of employees
 Past Questions Extract (Edexcel)
(1) Explain one disadvantage of being in a partnership. (3/20/paper1/Edexcel)
(2) Explain one benefit to a business of being a partnership. (3/21/paper1/Edexcel)
(3) What is meant by the term ‘partnership’?
(4) How would a deed of partnership benefit Azeem?
(5) State one reason why Tom Baker set up his business as a social enterprise.
(1/20/paper1/Edexcel)
(6) Explain one advantage of being a franchisee. (3/19/paper1/Edexcel)
(7) Define the term social enterprise. (1/20/paper2/Edexcel)
Past Questions Extract (Edexcel)

(8) Why is limited liability important to shareholders?

(9) Apart from limited liability, state three other advantages of forming a private limited company.
(10) Evaluate whether TADS should consider becoming a private limited company. You should
use the information provided as well as your own knowledge of business. (12/20/paper1/Edexcel)
(11) Explain one reason against Covers-up Ltd becoming a public limited company.
(12) State two advantages for HTL of changing to a public limited company
(13) State two disadvantages for HTL of changing to a public limited company, other than having
to publish its accounts.
(14) Analyze why having to publish accounts could be a disadvantage for HTL if it changed to a
public limited company.
(15) Define the term multinational business. (1/19/papre2/Edexcel)