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

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

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

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

Private sector: comprises businesses owned and controlled by individuals or

groups of individuals.

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

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

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

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

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Advantages Disadvantages
 Limited Liability  Legal formalities in formation
 Ease of buying and selling of  Cost of business consultants
shares for shareholders and financial advisers when
encourages investment creating such a company
 Separate legal identity  Risk of takeover due to the
availability of shares
 Access to substantial capital  Legal requirements
sources due to the ability to concerning disclosure of
issue a prospectus to the information to shareholders
public and to offer shares for and the public e.g. annual
sale publication of reports and
accounts
 Continuity  Share prices subject to
fluctuation – sometimes for
reasons beyond business
control
 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 Disadvantages
 Commitment/dedication  Succession/Continuity
problems
 Reliability and pride  Informality in setting practices
and procedures
 Knowledge and Continuity;  Traditional/Lack of innovation
training provided from young
age
 Family Conflict

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

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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 Disadvantages
 Fewer chances of new  Share of profits or revenue
business failing as an has to be paid to franchiser
established brand and product each year
are being used
 Advice and training offered by  Initial franchise license fee can
franchiser be expensive
 National advertising paid by  Local promotions may be paid
franchiser by franchisee
 Supplies obtained from  No choice of supplies or
established suppliers suppliers to be used
 Franchiser agrees not to open  Strict rules over pricing and
another branch in local area 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 Disadvantages
 Costs and risks of a new  Errors and mistakes might lead
business venture are shared to one blaming the other for
mistakes
 Different companies might  The business failure of one of
have different strengths and the partners would put the
experiences and they whole project at risk
therefore fit well together
 They might have their major  Styles of management and

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

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

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