CAIE AS Level Business (9609) 1.2 Business Structure Some common types of businesses Sole Trader / Partnership / Company Partnership Sole Trader Company Company Classification of businesses By production stage: • Primary sector • Secondary sector • Tertiary sector By ownership and control: • Public sector (Government) • Private sector (Non-government) Classification of businesses: production stage Primary sector business activity: • Firms that extract natural resources so that they can be used and processed by other firms • E.g. firms engaged in farming, fishing, oil extraction Secondary sector business activity: • Firms that manufacture and process products from natural resources • E.g. computer manufacturing, baking, textile mills, automobile assembling and construction Tertiary sector business activity: • Firms that provide services to consumers and other businesses • E.g. retailing, transport, insurance, banking, telecoms Classification of businesses: production stage Analysis: Changes in importance of each sector over time (in terms of employment %age OR output %age of the economy) Changes in business activity Primary → Secondary (industrializa!on) Benefits • Total output increases → be0er living standards • Results in lower imports and higher exports • More manufacturing businesses → more jobs created • Expansion/higher proļ¬ts → higher tax revenues Problems • Rural to urban migra4on → housing & social problems • Often lead to more imported raw material/components • Most manufacturing done by multi-national companies Changes in business activity Secondary → Ter!ary (deindustrializa!on) • Higher incomes → higher living standards → more spending on services e.g. restaurants, tourism, insurance and financial services • Cost of production rises (higher wages/lack of raw material) → imports becoming cheaper → manufacturing industries closing down Classification of businesses activity: by ownership Public sector • Comprises organisations accountable to and controlled by central or local government Classification of businesses activity: by ownership Private sector • Comprises businesses owned and controlled by individuals or group of individuals Economic systems Free-market economy • Economic resources are owned largely by the private sector with very little state intervention Mixed economy (the most common type) • Economic resources are owned and controlled by both private and public sectors Command economy • Economic resources are owned, planned and controlled by the state Why does government own organisations? • To provide essentials (education/healthcare/police etc) • strategic industries energy, public transport • “Public goods”; accessible and affordable for all The legal structure of business organisations The Private Sector NOTE: Public Limited Company plc (private sector) is NOT the same as Public Sector Corporation (government owned) Sole trader • A business in which ONE person provides the permanent finance and has full control and ownership of the business Advantages • Easy to set up – no legal formalities • Owner has complete control – not answerable to anyone • Owner keeps all profits • Able to choose own times and days of working • Establish close personal relationships with employees, customers and suppliers • Business can be based on the interests or skills of the owner Sole trader Disadvantages • Unlimited liability – all of owner’s assets are potentially at risk • Intense competition from bigger firms • Owner is unable to specialise in specific areas, responsible for all aspects of management • Difficult to arrange additional capital • Long hours of work necessary to make business successful • Lack of continuity – business does not have separate legal status, when the owner dies the business ends too Partnership • A business formed by two or more people to carry on a business together, with shared capital investment • A “partnership agreement” written to outline the details of the business but does not create a separate legal unit Advantages • Partners may specialise in different areas of business • Shared decision-making / responsibilities • Additional capital injected by each partner • Business losses shared between the partners • Greater privacy of accounts and fewer legal formalities than companies Partnership Disadvantages • Unlimited liability for all partners, except in LLPs • Profits are shared • No continuity and the partnership will have to be reformed in the event of the death of one of the partners • All partners bound by the decisions of any one of the partners • Cannot raise capital from selling shares • A sole trader will lose independence of decision-making if converting into a partnership Limited companies • When businesses are incorporated (brought into existence as a separate entity) • Ownership of companies is divided into small units called shares – leading to shareholders (may be directors too) • Share ownership more than 50% = CONTROL Limited liability: • If the company fails, the only liability a shareholder has is the amount invested in the company (in shares), not the personal wealth of the shareholder • People are prepared to provide finance to enable companies to expand • Greater risk of the company failing to pay its debts is now transferred from investors to creditors (lenders) Limited companies Legal personality • A company is recognised in law as having a legal identity separate from that of its owners • Can own assets and have liabilities in its own name • Can sue and can be sued in a court of law, not the owners Continuity • The death of an owner or director does not lead to a company’s break-up • Ownership can be easily passed through shares and the business continues Private limited companies • A small to medium-sized business that is owned by shareholders who are often members of the same family • The words ‘Limited’ or ‘Ltd’ or ‘(Pvt.) Ltd’ at the end of the name to identify – legal requirement • Shares can only be sold with the agreement of existing shareholders (friends or family) Advantages • Shareholders have limited liability • Separate legal personality • Continuity in the event of the death of a shareholder • Able to raise capital from sale of shares (friends/family) • Greater status than unincorporated businesses (sole trader, partnerships) Private limited companies Disadvantages • Legal formalities involved in establishing the business • Large amounts of capital cannot be raised by sale of shares to the general public • Selling shares for existing shareholders very restrictive • End-of-year accounts must be sent to Companies House (govt. authority), less secrecy of financial affairs Public limited companies • Very large businesses as they have access to very substantial funds for expansion and growth • Recognised by the use of ‘plc’ or ‘Inc’ after the company name – legal requirement • Have a legal right to sell shares to the general public – share prices are quoted on the national stock exchange • Shareholders are owners but they appoint a board of directors at the AGM (annual general meeting), through voting, to run the company Public limited companies Advantages • Same as private ltd companies: – Limited liability – Separate legal identity – Continuity PLUS • Ease of buying and selling of shares – encourages investment in PLCs • access to substantial capital sources – floatation of shares on a stock exchange (IPO) • Initial Public Offering along with a detailed prospectus Public limited companies Disadvantages • Legal formalities at the time formation • Cost of business consultants, financial advisers and auditors • Share prices subject to fluctuation • Legal requirements concerning disclosure of information to shareholders and the public, no secrecy • Risk of takeover due to the availability of the shares on the stock exchange – from a hostile competitor • ‘Short-termism’ (chasing dividends) can damage longterm investment strategies Private VS Public limited companies Private Ltd 5-6 Shareholders Public Ltd 160,000 Shareholders Public Ltd Private Ltd 62,700 Shareholders 8-10 Shareholders Legal formalities in setting up a company • Certain legal requirements in order to protect investors Memorandum of Association: A document that • states the name of the company • The address of the head office through which it can be contacted • The maximum share capital for which the company seeks authorisation (to calculate the relative worth of each share) • The declared aims of the business (to avoid any controversial associations/investments) Legal formalities in setting up a company Articles of Association: this document covers • The internal workings and control of the business • For example, the names of directors • The procedures to be followed at meetings will be detailed • After documentation, ‘certificate of incorporation’ is issued and company begins trading • Accounts and other documents will now be carefully maintained and regularly submitted to govt. authority Other forms of business organisation Cooperatives • All members can contribute to the running of the business, sharing the workload, responsibilities and decision-making • Very common form of organisation in some countries, especially in agriculture and retailing • Producer or worker cooperatives that are involved with making goods • Consumer or retail cooperatives that sell goods and services • All members have one vote at important meetings • Profits are shared equally among members Other forms of business organisation Cooperatives Benefits • Buying in bulk (raw materials etc) → lower costs • Selling collec4vely → be0er prices • Motivation for each member as profits are shared Drawbacks • Lack of management skills unless professionals hired • Capital restricted because cannot sell to general public • Slow decision-making if all members consulted Cooperatives - examples Other forms of business organisation Franchises • A business that uses the name, logo and trading systems of an existing successful business • Legal contract between two firms, franchiser & franchisee Advantages • Lower chances of new business failing due to an established brand and product • Advice and training of offered by the franchiser • National advertising paid for by franchiser • Good quality supplies obtained from established supplier • Franchiser agrees not to open another branch in the local area Other forms of business organisation Disadvantages • Share of profits or revenue has to be paid to franchiser • Initial franchise licence fee can be expensive • Local promotions may still have to be paid for by franchisee • No choice of supplies or suppliers to be used • Rules over pricing and layout of the outlet reduce owner’s control over their own business Other forms of business organisation Joint ventures • Two or more businesses agree to work closely together on a particular project and create a separate business division to do so • Costs and risks of a new business venture are shared • Different companies might have different strengths and experiences • They might have their major markets in different areas However • Styles of management and culture might be different • Mistakes might lead to one blaming the other • Business failure of one of the partners, risk for all Other forms of business organisation Holding company • A business organisation that owns and controls a number of separate businesses, but does not unite them into one unified company • Also known as ‘parent company’ • Diversifies (spreads risks) by keeping group companies independent Public corporation • A business enterprise owned and controlled by the state – also known as nationalised industry • Managed with social objectives rather than profits • Tendency towards inefficiency due to lack of profit aim
