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 profits → 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