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Chapter 2 - Business Structure - Coggle Diagram
Chapter 2 - Business Structure
Economic Sectors
Primary, Secondary, Tertiary, Quaternary sectors
Primary sector (Natural resources e.g. farming, fishing, forestry)
Secondary sector (Manufacturing e.g. turning raw materials to finished goods)
Tertiary sector (Provide a service e.g. banking, insurance, education)
Quaternary sector (based on skills and knowledge e.g. IT, Consultancy, Research and development)
Public and Private sectors
Economic activity is carried out by private sector businesses, owned by individuals
Public sector businesses are owned and run by the state
Private and public sector businesses have different objectives, and there is different legal structures and financial arrangements
Public sector businesses don't have the objective to maximise profits
Importance of the public and private sectors
Most countries have a mixed economy, some owned by individuals, and others run by the state
Government favour privatisation
Privatisation is the selling of public sector organisations to private owners in a share flotation
Private sector legal structures for a business
Factors that influence the choice of a particular legal structure include size, owners responsibility, financial arrangements, level of owners risk, possible sources of finance
Ability to raise finance is a crucial factor, a small firm with one owner will find it harder to raise finance that a large business with a record of sound borrowing
Another key factor is the ability of the business to become a complete legal entity, separate from the owners, meaning it can raise finance in its own right
Business ownership
Types and appropriateness of business ownership
Sole trader
An individual who owns and runs a business, taking final decision
Few sole traders are large businesses with many employees; many other have a small number of employees or none
The owner has unlimited liability and few administrative or legal requirements
The business is not a separate legal entity, so it finished if the owner dies
Advantages are it is quick and easy to set up, flexibility, owner controlled and confidentiality
Disadvantages are unlimited liability, difficult to raise finance, owner needs all skills for business
Partnership
2 or more people run a business
Many countries place limits on the maximum of partners
No requirement for formal documents or agreements
Unlimited liability, not legal entity's
Advantages are it is quick and easy to set up, more capital raising ability, shared responsibility
Disadvantages are unlimited liability, slower decision making, partnership finished if one person leaves
Limited companies
Incorporation: separate legal identity from the owners
Ownership is through share issue and can be sold
Limited liability of owners
Management is by a board of directors
Private limited companies
Small and family owned
Cheap to set up
Not all accounts and reports open to public
Cant be taken over without shareholder agreement
Public limited companies
Usually a large business
Share issued for sale publicity to anyone via a stock exchange
Accounts, reports and AGM open to anyone
Easier to take over
Franchises
A franchise is a smaller business that uses the advantages of a large well-known brand in return for payment
Franchiser supplies a name, logo and generic marketing, lays down the contition for the produce
The Franchisee supplies the premises, equipment and staff
Is a 2 way agreement with advantages and disadvantages for both parties
Franchisee gets access to a successful marketing model, training and support from franchisor, cheap resources
Franchisor gets guaranteed regular income, low expansion costs, access to local knowledge, control over final product
Cooperatives
A business that is owned and run by its members
Cooperatives may be consumer based (members are customers), or worker based (members are workers)
Members own and run the business and share in the profits
Enable their members to achieve economies of sales, control of the business activities, gain greater power in markets
Difficult for a cooperative to become a large business
Raising finance isn't easy, and taking decisions can be complex as all members are entitled to have a say
Cooperatives set up as social enterprises
Joint ventures
Sometimes 2 or more businesses may work together on a particular project, sharing staff, capital, and experience but keeping their own identity
Setting up a jointly owned and controlled business, lasting only the duration of the project
Enables flexibility and access to resources, enabling a faster growth, higher productivity, higher profits
However there may be increased costs, due to differing objectives, unequal contributions, cultural and management differences
Other Structures
In the private sector they are social enterprises that take the form of community enterprises or not-for-profit companies
In the public sector, they may be public corporations or chartered businesses set up by government
Business enterprise measures risks and rewards
In private enterprise, this focuses on financial rewards
Social enterprise focusses on improving society but needs to make a trading surplus or profit to be sustainable
Social enterprises
A business that trades for social or environmental purposes
Social enterprises aim to make a difference to society with a clear social/environmental mission, gain income from selling goods and services, reinvest profits, operates in a range of sizes and structures
Providing employment, increasing woman employment, recycling furniture, providing IT to charities, improving local environment
Need to have a different business structure from that of normal partnership or joint-stock companies
Their social objectives, requirement to reinvest profits, need to pass on assets need to be written into their constitutions
The targets include economic or financial performance (Costs, revenue, surplus), social impact (core objectives), environmental sustainability (effect on environment)
Importance of limited liability
Limited liability means that the responsibility of the owner of a business for business debts is limited only to the specific amount they invested in the business, and doesn't include other assets
Owner cannot lose more money than they invested in the business, encouraging investment
Occurs because the business is registered as a separate legal entity, capable of Sueing and being sued
Unlimited liability means the responsibility of the owner of the business debt is not limited to the amount invested, so business debts might have to be paid not just from the assets of the business, but from assets of owner
Changing from one business type to another
Common progression as a business grows is from a sole trader, to partnership, to a private limited company, to public limited company
A change to another legal structure involves a change of ownership and management
Advantages
Sole traders can be dissolved without expensive and time consuming administrative and regulatory requirements
Disadvantages
Owners must agree to dissolve the business, and set up a new one
Hard to find new owners or shareholders for a different structure
Costs time and money to satisfy regulatory requirements