Chapter 2
Personal use only
Types of
Businesses
Classification of business
There is a number of different ways of classifying businesses. Classification is a process of
putting businesses with common characteristics into groups. The reason we do this is to increase
our understanding of the businesses, by studying the characteristics they have in common. This
study will help us develop general principles on how they can be managed more effectively.
Some of the most common classifications are:
size – small to medium enterprises (SMEs), large
**
** local, national, global
** industry primary, secondary, tertiary, quaternary, quinary
** legal structure – sole trader, partnership, private company, public company, government
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Classification
puts businesses with
common characteristics into
groups
enterprise
HomeThink
How are people in your school classified? Think about both the classification of students
and staff.
33
2.1
Size - small to medium enterprises (SMEs), large
Often it can be helpful to group businesses on the basis of size. This is because some problems
are associated with the size of the business. Large businesses, for example, are more complex to
manage and are often slower to respond to changes in the environment.
On the other hand, smaller businesses have much greater flexibility and this enables the
managers of these businesses to respond more quickly to such things as a change in consumer
tastes or technology and so on. Smaller businesses find it is often very difficult to raise the
finance they need to grow the business.
The Australian Bureau of Statistics (ABS) defines a business as small if it employs fewer than 20
people. Typically medium-sized enterprises employ between 50 – 100 employees and businesses
employing more than 100 people are regarded as large. It is important to realise, however, that
there is not a lot of consistency in the definitions of small, medium and large businesses.
non-employing businesses
micro businesses
- sole proprietorships and partnerships
without employees
- businesses employing less than 5 people,
including non-employing businesses
other small businesses
- businesses employing 5 or more people,
but less than 20 people
medium businesses
- businesses employing 20 or more people,
but less than 200 people and
large businesses
- businesses employing 200 or more people.
ABS’ definitions in their
Small Business in Australia
2001 publication
Scaffold
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Explain scaffold
Difficulty:
Mark Range:
Definition:
Comments:
Low - Medium
1-8
Relate cause and effect; make the relationship between things evident
Often used in short response questions in HSC Business papers
Example
Scaffold
Format
1. Begin with an introductory
sentence that sets out the main
idea of what you are writing
about.
34
2. Set out the cause and effect and
show the relationship between
them.
3. Sometimes a concluding
sentence might be helpful.
Example
Model
Explain the shortest way to get to the new
Business Studies classroom.
Example
There are several ways you can go to get to the new classroom, but the
quickest way is through the front office. The alternative ways involve
going around the bottom ovals and this takes time.
If you go through the front office and turn left, there is a short cut
between the A block classrooms and the B block classrooms. Just this
section can save ten minutes compared to going around the ovals.
When you go through the alley between A and B Blocks, turn right
and follow the path. This will take you straight to the classroom.
I am quite sure this is the best way to find the room.
Explain the ABS’ definition of small, medium and
large businesses
Begin with an introductory sentence that The Australian Bureau of Statistics (ABS) uses employment numbers
as the basis for classifying businesses. Classification is important in
sets out the main idea.
understanding the contribution of different sized business to the
national economy.
Define specialist term in the next
sentence.
If there are 20, or fewer, employees, then the business is regarded as
small.
Set out the cause and effect and show the Under this definition 94% of all businesses in Australia are small. Small
businesses are a feature of business in all industry sectors, including
relationship between them.
mining, agriculture, manufacturing and retailing.
Set out the cause and effect and show the The ABS defines a medium enterprise as a business employing between
relationship between them.
20 and 200 employees. Under this definition about 5% of Australian
businesses could be regarded as medium. Small to medium enterprises
comprise nearly 99.5% of all businesses in Australia
Set out the cause and effect and show the Large businesses are also distinguished on the basis of the number of
people they employ - they are businesses employing more than 200
relationship between them.
people. A typical example is Woolworths.
The concluding sentence is probably
appropriate here.
While the number of employees is an effective way to classify the size of
businesses, there are instances, such as in agricultural businesses, where
it is not an appropriate way to define the size of a business.
RedPeg Publishing Preliminary Business Studies
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Local, national, global
It can also be helpful to classify businesses on the basis of where they conduct their business.
Local businesses are those within your immediate environment. Typically they are small
to medium businesses, such as small retail businesses and small to medium manufacturing
businesses. The local environment in which they operate is very important and the needs of
their customers very specific.
National businesses operate throughout Australia. Typical examples include businesses like
Coles and Woolworths. Both these businesses have stores in most towns throughout the
country. National businesses occur in most industries. The four major Australian banks and
insurance businesses operate nationally.
National
businesses operate
throughout Australia
When businesses conduct their operations in global markets, they often face a different set of
problems from a business that operates in the domestic environment.
Global businesses conduct operations not only in Australia, but also in other countries. Some
of Australia’s most important global businesses are mining businesses and the most important is
BHP Billiton.
35
However, increasing numbers of businesses are taking advantage of the opportunities the global
An increasing
markets provide. Many Australian businesses such as Pacific Brands, the manufacturers of the
number of Australian
Bonds brand of clothing, use factories in China to do the manufacturing to minimise expenses. businesses are entering
Even small businesses such as Preshafoods Limited export a range of fruit juices to global
global markets
markets in Hong Kong and Singapore and are developing plans to export to Japan, Europe and
the United States.
Dell Inc. is a true global
technology company.
Founded by a 19 year old
Michael Dell in Austin,
Texas in 1984, it has grown
to become one of the largest
technology companies in
the world and now sells
high quality affordable
technology to customers in
180 countries.
Image: Courtesy of Dell Inc.
Get Going with Business
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Activities
Work with a partner to classify the businesses in a section of your local area that you are
familiar with. Use a street directory to quickly sketch a map outline and from memory and
discussion annotate the map with the names of the businesses and what they do. Try to use
as many types of classification as possible. When you are next passing the businesses, look
for clues that might support your classification.
2.2
Industry - primary, secondary,
tertiary, quaternary, quinary
36
It can be helpful to classify businesses on the basis of the industry in which they operate. This
sort of classification enables useful analysis between a particular business and the average
business in that industry and the most effective businesses in the industry. It can be helpful to
look at what the most effective businesses are doing that has led to their success and do some of
the things those businesses are doing. It also allows for easy recognition of which industries in
the economy are expanding and which are contracting. However, trying to define industries can
be a complex process. The ABS uses 17 main classifications:
** Agriculture, Forestry and Fishing
** Mining
** Manufacturing
** Electricity, Gas and Water Supply
** Construction
** Wholesale Trade
** Retail Trade
** Accommodation, Cafes and Restaurants
** Transport and Storage
Barry Jones was
a Minister in the Hawke
government from 1983
to 1990. His portfoilos
included Minister of
Science and Minister of
Small Business.
** Communication Services
** Finance and Insurance
** Property and Business Services
** Government Administration and Defence
** Education
** Health and Community Services
** Cultural and Recreational Services
** Personal and Other Services
These classification are further subdivided into specialisations. This system is very accurate.
However, as Barry Jones explains in his book Sleepers, Wake!: Technology and the Future of
Work, it is very complex and it does not take into account the relationship between paid and
unpaid work (such as child or aged care). Rather a framework of 5 industries can be used
that groups the businesses that perform a similar type of economic activity. This provides the
information on trends managers want but without all the complexity of the ABS’ classification
system.
Primary industry
Primary industry refers to all businesses based on the extraction of natural resources, including
Primary
agricultural businesses. BHP Billiton and Rio Tinto are examples of global businesses that would
industry is highly weighted
be classified as primary industry because they extract minerals. Small businesses based on
towards males.
fishing and the family farm are also examples of primary industry.
RedPeg Publishing Preliminary Business Studies
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Wheat farming is an example of a
primary industry.
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Primary
businesses extract natural
resources
38
Secondary industry
Secondary industry involves manufacturing and construction. It is the industry that converts
the output of the primary industry into finished and semi-finished goods, such as cars, breakfast
cereals, steel and houses. Although there has been a decline in manufacturing in Australia
over the last five years, the manufacturing industry is the third largest employer in Australia,
employing just on a million Australians. Over the last five years to 2010 there was a 4.5% decline
in the number of people employed in this industry and it is expected the decline will continue
over the next five years to 2015. A typical example of the decline in the manufacturing industry
is the loss of 6 800 jobs in furniture manufacturing over the five years to 2010.
RedPeg Publishing Preliminary Business Studies
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Tertiary industry
The tertiary industry or ‘service industry’, as it is sometimes called, is essentially concerned with
selling and distributing goods rather than making them. Tertiary industries provide essential
services that allow primary and secondary industries to function. The tertiary industry includes
those businesses concerned with distribution and activities related to transportation, storage,
and retailing. This classification also includes businesses that are regarded as utilities. Utilities
are businesses involved in things like electricity and water supply. Sydney Water, for example,
is a government-owned business that would be classified as a utility. It may help to think of
tertiary services being more tangible types of service, such as hair-cuts and heating.
The Toll Group is an interesting example of an Australian business in the tertiary sector. The
Toll Group is an integrated transport group of businesses that encompasses air, sea and land
transport. It has revenues (total value of the sale of its products over a year) of $6.5 billion. The
business is Australia’s largest transport company.
39
Research Task
Visit the Toll Group’s web site and note their development since 1888. List the variety of
jobs its 35 000 employees perform.
2.3
HomeThink
What are the public utilities on the Monopoly board?
2.4
Get Going with Business
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
When industry classifications first started there were only the first three, primary, secondary
and tertiary. However, by the 1950s a new range of services had became available that employed
large numbers of people but were not like the services of the tertiary industry. This led to
the creation of two specialised service industry classifications, the quaternary and quinary
industries.
Quaternary industry
The quaternary industry consists of businesses that, like the tertiary sector, provide services
but with a focus on information processing. The quaternary sector differs to the tertiary sector
because of its emphasis on technology, intellectual activities and the processing of symbols
and/or symbolic objects such as information, numbers, words, or money. In other words,
the quaternary classification is focused on the acquisition and manipulation of information,
generation of information and information sharing. The quaternary industry has largely grown
from and been enabled by the rapid change and development in information technology and
communication (ICT).
Typical examples of quaternary businesses include banks, insurance businesses, media,
researchers, politicians, and real estate.
40
Quinary industry
The quinary industry also consists of businesses that provide services but there is a difference.
Businesses in the quinary industry provide services such as education, health care and domestic
work that focus on consumers. Typically the businesses focus on the sort of services that
were traditionally provided by the home (domestic services). We may include carers, hotels,
motels, caterers and restaurateurs in this category. This category also includes not-for-profit
organisations such as the Salvation Army and government organisations such as health,
education and police. Barry Jones suggests that there are three components of the quinary
sector - unpaid work (house work, caring for children and the elderly, and voluntary work);
home-based paid work (hobbies that produce income); and professional domestic-type work
(institutional care, hotels, restaurants and cleaning/maintenance services).
Literacy Development
The words primary, secondary, tertiary, quaternary, and quinary came from the Latin and
simply mean ‘one’, ‘two’, ‘three’, ‘four’, ‘five’. Can you think of other situations where we use
this terminology rather than the English?
2.5
The product of the tertiary, quaternary and quinary service industries directly feeds back into
the primary and secondary industries, with all five sectors operating interdependently and
complementary of each other. The categories of tertiary, quaternary and quinary now dominate
industrialised economies such as Australia and the United States. In effect tertiary, quaternary
and quinary industries all deal with services and you will find a variety of definitions as to what
should be included in each category. Some people claim, for example, that education is more
RedPeg Publishing Preliminary Business Studies
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
concerned with information processing and the acquisition and manipulation of information
and would be better classified as quaternary. Others argue it is more a consumer service and
should be in the quinary sector. Indeed, some business types are a little difficult to classify.
For example when a medical service provides advice or information to patients they would
be classified as quaternary, however, if the same medical service removes your stitches then
they would be classified as tertiary. Ultimately, when classifying businesses by industry, it is
important to identify a business’ primary economic activity to accurately classify its industry.
Understanding the relationship between the five industries can make the classification process a
little easier. Below is an example of how the 5 industries relate to a loaf or slice of bread.
41
Diagram modified from Jones B. (1995) Sleepers, Wake! Technology & the Future of Work, page 54, Oxford University Press, Melbourne
Think, Pair, Share
In developing countries such as China and India the primary and secondary sectors
dominate the economy and tertiary, quaternary and quinary sectors are poorly
developed. In the developed countries it is the opposite. What do you think might be the
reason for this? What implications does this observation have for education and training
in Australia? Jot down your thoughts and then discuss them with your learning partner.
2.5
Get Going with Business
Worksheet
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Types of Businesses
Worksheet 2.1
1. Complete the following table that classifies businesses by industry sector.
Business
Primary
Description
2 Local Examples
Secondary
Tertiary
Quaternary
Quinary
2. In which sector do you think you will find employment? Explain.
42
3. Imagine you are a business consultant and have been asked to advise the management of a national business
on the advantages and disadvantages of global expansion. Write a 200 word report to summarise your
advice.
4.Governments have tended to privatise government enterprises. Write an email (100 words) to your state
MP, expressing your opinion on the proposed privatisation of either CityRail or CountryLink.
RedPeg Publishing Preliminary Business Studies
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Legal structure - sole trader, partnership, private
company, public company, government enterprise
Businesses can be grouped by the different legal ways they are owned. Laws determine the
characteristics of a business with a particular legal structure. In Australia, all businesses are
classified into two broad groups: incorporated businesses and unincorporated businesses.
Incorporation means a business has gone through a legal process to create a business legally
Incorporation
separate from its owners. This legal business can own assets, employ people and make contracts
is a process that legally
with other businesses. An incorporated business is a company.
An Incorporated Business is a Separate Entity
Private Entity
- Investor
Funds to
start a
business
separates a business from its
owners
Business Entity
is Separate
43
Incorporation protects
these assets
Dividends
Only the Business is
Responsible for its Debts
Unincorporated businesses are not legally separate from their owners. The activities of the
owners and the business are separate, but it is the owner who pays tax rather than the business.
Unincorporated
The following extract is how the Department of Fair Trading classifies businesses on the basis of
businesses are not legally
legal ownership:
separated from their owners
‘If the shoe fits’
The Office of Fair Trading uses the analogy of a well-fitting pair of shoes to stress the
importance of choosing the most appropriate legal entity to run a business.
The Office maintains that people considering the establishment of a business need to
carefully consider the advantages and disadvantages of a particular entity.
Get Going with Business
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
It argues that the structure chosen to run a business should ‘fit comfortably, like a good pair
of shoes’ and that a poorly considered choice
can have ‘painful consequences’. The most
common business structures are sole trader,
partnership, proprietary limited company,
association and co-operative. Each has
advantages and disadvantages.
The business structure that best suits a
particular person depends on factors such as
taxation, type and size of business, finance
requirements and establishment costs.
The Office of Fair Trading argues a ‘final
decision should only be made after talking to
your accountant or solicitor.’
44
The sole
trader entity is simple and
inexpensive to establish
Sole trader
The sole trader entity is the simplest and most inexpensive form of business structure to set up
as there is only one owner. The owner of the sole trading business can trade under their own
name, such as, for example, ‘Dave Cullen’. However, if other words are included in the title of
the business, then a business name must be registered. If, for example, the business was named
‘Dave Cullen’s Blacktown Electrical Services’ it is compulsory to register the business name with
the Office of Fair Trading. An electrician would also be required to get a contractor licence and
display their licence number on all advertising, stationery and signage.
It is most important to understand that registration of a business name does not make the
sole trader a separate legal entity.
The owner of the business will still
be responsible for any actions of the
business and personally liable for all
business debts.
The sole trader is the owner of the
business and is responsible for making
all the decisions in the business. In
other words, the owner is directly
responsible for the success or failure
of the business. The owner of the
business is personally responsible for
all the debts of the business. Ironically,
personal responsibility makes it easier
to borrow money and get goods from
suppliers on credit. This is because
the lender or the supplier knows they
can ask a court to access the personal
RedPeg Publishing Preliminary Business Studies
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
assets of the sole trader if the loan or bill is not paid.
Partnership
A partnership is defined by the Partnership Act 1892 (NSW) as ‘the relationship that exists
between persons carrying on a business in common with a view to profit’. It involves an
agreement between two or more parties to enter into a legally binding relationship and is
essentially a contract between the partners.
A
partnership is defined by
the Partnership Act
The Office of Fair Trading suggests it is ‘wise to have a formal written partnership because it
sets out each partner’s responsibilities and reduces the likelihood of disputes’. For example, one
partner may be contributing more money or time to the business and therefore be entitled to
a greater share in the business. An agreement can also cover what happens if the structure is
dissolved or changed; for example, through the retirement or death of one of the partners.
Another problem can develop if the business fails owing a lot of money to creditors. The
partnership entity has unlimited liability. This means the personal assets of the owners can be
taken, with the permission of a court, to pay the business debts. In other words it is possible for
one of the partners to lose their home while another partner loses no personal assets because
they don’t own any.
The partnership entity makes it easier to raise the money to establish a business because there
are more people to contribute. It also has the advantage of bringing different talents to the
business. There may also be tax advantages, although only accountants and solicitors can advise
on things like this. On the other hand, the unlimited liability aspect is very important and again
needs the advice of accountants.
45
Unlimited
liability can be a problem for
some partners. Always get
advice.
Private company
A private company is a more complex business structure, formed by one or more people who
wish to have a business that is a separate legal entity to themselves. This is not an easy idea to
Get Going with Business
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
understand. In law the company can employ people, purchase goods, own property and earn
profit. Indeed, people who decide to conduct their business as a company could simultaneously
be an employee, director and/or shareholder of the company.
Private companies are regulated under the Corporations Law, which sets out substantial
obligations for company directors. Establishment and ongoing administrative costs associated
with Corporations Law compliance can be high. This is why the structure is generally
Private companies considered to be better suited to medium to large businesses.
are regulated under the
Corporations Law
Companies have limited liability. Limited liability means that, if the company is unable to pay its
debts, only the assets of the company can be sold to pay those debts. The liability of the owners,
or shareholders, is limited to the unpaid value of any shares they may hold. If the shares they
own are fully paid, the shareholder has no liability for the company’s debts.
Limited liability
means only the assets of the
Often, limited liability is misunderstood. The company must pay its debts. Small companies
company, not those of its
may find it difficult to borrow because investors and suppliers are apprehensive about lending
owners, can be sold to meet
to a business where there is no track record of bills being paid on time. The directors of the
company debts
46
company may have to provide personal guarantees that if the business is unable to pay the debt
they will.
IKEA is one of the worlds
largest private companies,
making its founder Ingvar
Kamprad the 11th richest
man in the world according
to Forbes.com’s World’s
Billionaires 2010
Public companies
can sell shares to the general
public
Public company
Public companies are allowed to ask the general public to buy shares in the business.
Woolworths is an example of a public company. Public companies are listed on the stock
exchange. The shareholders elect a group called the Board of Directors to run the company
on their behalf. The Board of Directors, in turn, appoints a chief executive officer (CEO) to
RedPeg Publishing Preliminary Business Studies
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
determine the actual operation of the business. The CEO and the Board of Directors work
closely together to determine future plans.
Public companies must issue a prospectus before they are permitted to approach the general
public for funds. The prospectus gives a potential shareholder all the information about the
proposed business they need to make a reasonable decision on the likely success or failure of
the company.
The most important advantage of a public company is the ability to raise large amounts of
finance by bringing together the surplus cash of many thousands of shareholders who are
investing in the company. The availability of finance allows professional managers to be
appointed from the establishment phase of the business.
Of course, because the general public invests money in public companies, they are carefully
regulated. The laws that regulate the behaviour of public companies are called the Corporation
Laws. These laws focus on disclosure. The public company must publish all the information
concerning their financial transactions.
A prospectus
gives potential investors all
the information they need to
make a decision
Public companies
are carefully regulated
47
The Commonwealth Bank
was rated by Forbes.com’s
Global 2000 2010 as
Australia’s largest public
company and 59th in the
world.
Think, Pair, Share
Do some research on a public company and choose one you think will increase in value
over the next year. Discuss with your learning partner the reasons you think the company
will increase in value. Buy an imaginary 1 000 shares in the company. Check out the
progress of the share price over the year.
2.7
Get Going with Business
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Government enterprises
Some businesses are classified as government enterprises. Government enterprises are
businesses owned and operated by either the state or federal government. In the past the
federal government owned and operated quite a variety of businesses that included an airline
(Qantas), a bank (Commonwealth Bank of Australia), and a telephone company (Telstra). The
shareholders who bought the businesses from the government in a process called privatisation
now own these businesses.
Government
enterprises are owned and
operated by either state or
federal government
The Australian government still operates a number of businesses. These businesses include
Australian Postal Corporation, Australian Rail Track Corporation Limited and Medibank
Private Limited.
Think, Pair, Share
48
What do you think about government-owned businesses? Do you think the Australian
government should be in businesses such as airline and banking businesses, or do you
think it was right to sell them to members of the general public? Do you think there
are any businesses a government should own and operate? Jot down your thoughts and
compare them with your partner.
2.8
State governments tend to own a number of businesses, usually utility businesses such as State
Rail, NSW Water and electrical power generating and distribution businesses. As with the
Governments
Australian Government, the NSW State government has also privatised state-owned businesses
are increasingly privatising such as the State Bank and the Government Insurance Office (GIO).
the businesses they own
Think, Pair, Share
What do you think about state governments operating basic utility businesses such as rail
and electricity? The Victorian government has privatised both the Victorian rail network
and electricity. Can you think of any advantages in private, rather than government
ownership of a business? Jot down your thoughts and discuss them with your partner.
2.9
RedPeg Publishing Preliminary Business Studies
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Activities
1. What do you think the Office of Fair Trading means by the phrase ‘if the shoe fits’?
2. A sole trader refers to a business owned by one person. Does this mean sole trader
businesses have only one person working in the business? Or is it possible for a sole
trader entity to be a large business? Do sole trader businesses have to register their
business name with the Office of Fair Trading?
3. Discuss the statement that ‘registration of a business name does not make the sole
trader a separate legal entity’ with your learning partner. What do you think it means?
4. What is a partnership?
5. Why does the Office of Fair Trading advise people using this form of legal ownership
to have a formal written partnership agreement?
6. Why do you think the Department of Fair Trading suggests a company structure is
better suited to medium to large businesses?
7. Discuss the phrase ‘separate legal entity to themselves’ with a partner. What do you
49
think it means? How could you be an employee of a business that you own?
2.10
Factors influencing choice of legal
structure
Size
Size of the
The size of the business is an obvious factor in the choice of legal structure. Medium to large
business is an important
businesses are almost invariably conducted as companies. This is because it would be difficult to consideration in
raise money from a lot of shareholders without the protection of limited liability. Shareholders determining the type of
know from the outset they are liable only for the unpaid value of their shares. Limited liability is legal structure
an essential element in raising large amounts of cash.
Large businesses require not only large amounts of money but also specialist management skills.
For this reason also the company entity is the best choice of legal structure for a large business.
When large businesses fail, as with, for example, Ansett and OneTel, large amounts of money
are lost. Even rich people conducting such businesses as sole traders could very rapidly become
poor people.
Small businesses rarely have the money needed to issue prospectuses and employ specialist
managers. This is why the most appropriate choice of legal structure for a small business is the
sole trader or partnership entity. The people who start small businesses also want to control
the business and this may not be possible in a large public company, although there are plenty
of examples where successful owners have grown the value of the business and turned it into a
public company but have still managed to keep control.
Get Going with Business
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Research Task
Research the failure of a large public company such as Ansett, OneTel or HIH Insurance.
2.11
Ownership
Ownership is
associated with control
50
Ownership is important to many people in business. Ownership is associated with control.
The sole trader entity is appropriate for people who want to make the decisions and accept
responsibility for their own actions. Investors or shareholders in large companies have limited
control. This factor is important for some people.
Another interesting aspect is the trend by governments to sell government businesses to the
private sector. A recent example was the sale of Telstra to the private sector. Privatisation
can be a significant consideration for governments. The argument goes along the lines that
governments should not be running businesses in a free market because government ownership
distorts the market and consumers benefit from free markets. Governments of all political
persuasions have been privatising government businesses because, they argue, the privatised
business is more efficient than the government business and customers benefit from the
improved efficiency.
Think, Pair, Share
What are your views on privatising government businesses such as Qantas and Telstra?
Would your opinion change if the business being privatised were a state government run
electricity or water business? Should motorways be privatised?
Jot down your opinions and discuss them with a friend.
2.12
Finance
Finance is
needed for a number of
purposes
The amount of finance needed to establish and run the business can be an important
consideration in the choice of legal entity. The sole trader entity may be appropriate when the
finance needed to establish the business is relatively small, while a company structure is usually
required to establish businesses requiring a large amount of cash.
Finance will be needed for two basic purposes. The first is to establish or purchase the business.
The second need is for finance for the day-to-day running of the business – the purchase, for
example, of stock or raw materials. The money will often need to be paid before the money
is received from the sale of the goods to customers. The money needed for the day-to-day
operations of the business is called working capital. If the business is employing people, then
wages will have to be paid and the working capital needed will be much greater.
RedPeg Publishing Preliminary Business Studies
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Savings are often important to finance
the establishment of a business.
Types of Business
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
Activities
Ever thought how much finance would be needed to purchase a hairdressing business? In
2010 there was one for sale in Southern Sydney for $49 000. Or perhaps you would prefer
to purchase a moderate sized supermarket in Sydney for $55 000, or possibly a courier van
with established route for $37 500.
Research businesses for sale by googling ‘businesses for sale Australia’.
Each person in your group should choose a business that he/she thinks represents value for
money and would be an enjoyable business to manage. Describe the business, the number
of people you think would be needed to run it, the asking price and your estimate of how
much it would cost to run the business for a month. Calculate how much the present
owner claims would be earned in a month. Share your research with other members of the
group.
2.13
52
RedPeg Publishing Preliminary Business Studies
Types of Businesses
Worksheet 2.2
taxation
unincorporated
Worksheet
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
establishment
incorporated
finance
size
type
unincorporated
incorporated
Section 1
Use the words in the word box to complete the following exercise on legal structures to own a business.
1. The two main groups based on the way businesses are owned are:
2. Those businesses that are legally separated from their owners are called
businesses.
3. Those businesses that are not legally separate from their owners are called
businesses.
4. The factors that should be considered when deciding on the best business structure for a particular
circumstance include:
*
53
*
and
*
requirements
*
cost
Section 2
Scenario
Imagine you are a business consultant. You give good business advice to ordinary people who want to run their own
business. Your client Claudia wants to start a business as an electrician. She wants your advice on the simplest and
most inexpensive form of business structure.
* Your advice on business structure is * One important advantage of this structure is * One important thing to keep in mind because Claudia has mortgaged her house to secure a business loan is
* Unlimited liability means Section 3
Writing exercise
Write a one page report to: Discuss the legal structures that Claudia might consider when establishing her business.
Paragraph 1 * restate the question
* define the term introduced in the introductory
sentence (legal structure)
* set out the various options (sole trader, partnership etc)
Paragraph 2
* introductory sentence
* define the term introduced in the introductory sentence
(sole trader)
* set out an advantage and disadvantage of the sole trader
entity
Paragraphs 3 and 4 based on paragraph 2 for partnership and private company
Get Going with Business