Chapter 2: Business Structure (AS LEVEL BUSINESS STUDIES)

Definitions to remember:

• 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, baking, hotels, tourism and telecommunications.
• Public Sector - comprises of all of the organisations accountable to and controlled by the central or local government.
• Private Sector - comprises of all the businesses owned and controlled by individuals or groups of individuals.
• Mixed Economy - economic resources are owned and controlled by both private and public sectors.
• Free-market Economy - economic resources are owned largely by the private sector with very little state intervention
• Command Economy - economic resources are owned, planned and controlled by the state. 
• 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.
• Partnership - a business formed by two or more people to carry on a business together, with shared capital investment and, usually, shared responsibilities.
• 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 shareholder
• Private Limited Company - a small to medium sized business that is owned by shareholders who are often members of the same family; this company cannot sell shares to the general public.
• 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
• Public Limited Company - a limited company, often a large business, with the legal right to sell shares to the general public - share prices are quoted on the national stock exchange.
• Memorandum of Association - this 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 and the declared aims of the business. 
• Articles of Association - this document covers the internal workings and controls of the business (for example: the name of the directors and the procedures to be followed at meetings will be detailed).
• Franchise - a business that uses the name, logo and trading systems of an existing successful business
• Joint Venture - two or more businesses agree to work closely together on a particular project and create a separate business division to do so
• Holding Company - a business organisation that owns and controls a number of separate businesses, but does not unite them into one unified company.
• Public Corporations - a business enterprise owned and controlled by the state - also known as nationalised industry.

Notes:

Sole Trader

Advantages:

• easy to set up - no legal formalities needed
• owner has complete control - not answerable to anybody else
• owner keeps all profits
• the owner is able to choose times and patterns of working
• because it is a small business, the entrepreneur is able to establish close personal relationships with staff and customers
• the business can be based on the interests or skills of the owner since the entrepreneur is not as an employee for a larger firm

Disadvantages:

• the owner has unlimited liability so all of the owner's assets are potentially at risk
• since it is a small business, it faces competition from larger firms that have operated for a longer time in the market
• the owner is at risk since they are responsible for all aspects of management of the business
• since he is on his own, it is difficult to raise additional capital 
• involves of long hours of work in order to make the business pay
• lack of continuity - the business does not have separate legal status so when the owner dies, the business ends too.

Partnership

Advantages:

• partners may specialise in different areas of the business so the task is divided amongst the partners
• there is shared decision-making giving less weight on each partner
• additional capital is injected into the business by each partner
• the losses of the business is shared between the partners
• there is much greater privacy and very few legal formalities compared to corporate organisations

Disadvantages:

• unlimited liability is given to all partners
• the profits are being shared amongst the partners
• just like the sole trader, there is no continuity and the partnership will have to be reformed in the event of the death of one of the partners
• it is not possible for the partners to raise capital from selling their shares
• with the existence of partners, there will be a loss of independence when making decisions.

Private Limited Companies

Advantages:

• the shareholders have limited liability
• there is a separate legal personality between the shareholders and the business
• the company is able to continue in the event of the death of a shareholder
• the original owner of the company is often able to retain control of the business
• raising capital can be done by the sale of shares to family, friends and employees
• a private limited company has a greater status compared to an unincorporated business

Disadvantages:

• there are legal formalities that are involved when establishing the business
• capital cannot be raised by the sale of shares to the general public
• it is quite difficult for shareholders to sell shares
• there is less secrecy about the financial affairs that the company has compared to a sole trader and a partnership

Public Limited Companies

Advantages:

• the shareholders have limited liability
• there is a separate legal identity between the shareholders and the business
• continuity (the company is able to continue in the death of a sole trader
• ease of buying and selling shares for the shareholders
• they have access to substantial capital sources since they have the ability to offer shares for sale to the general public

Disadvantages:

• there are legal formalities needed when setting up this business
• expensive - this is because there is a need to hire business consultants and financial advisers when creating such a company
• share prices are subject to fluctuate due to reasons beyond the control of the owners (for example: the state of the economy) 
• legal requirements concerning disclosure of information to shareholders and the public
• there is a risk of takeover due to the availability of the shares on the stock exchange
• directors influenced by short term objectives of major investors

Franchise
Advantages:

• fewer chances of the new business failing since the name of an established brand and product are being used
• advice and training is offered by the franchiser
• national advertising is being paid for by the franchiser
• the supplies used in the franchise are obtained from quality checked suppliers
• franchiser agrees not to open another branch in the local area

Disadvantages:

• share of profits or revenue have to be paid to the franchiser each year
• the initial franchise fee can be expensive to pay
• local promotion still have to be paid for by the franchisee
• no choice of supplies or suppliers to be used
• there are strict rules over pricing and layout of the outlet reduces the franchisee's control over their own business

Joint Ventures

Advantages:

• the costs and risks of a new business venture are shared - this is a major consideration when the cost of developing new products is rising rapidly
• different companies might have different strengths and experiences and they therefore fit well together
• they might have their major markets in different countries and they could exploit these with the new product more effectively than if they both decided to 'go it alone.'

Disadvantages

• styles of management and culture might be so different that the two teams do not blend well together
• errors and mistakes might lead to one blaming the other for mistakes
• the business failure of one of the partners would put the whole project at risk

Holding Companies

Advantages:

• the holding company eliminates any competition due to centralised control over the subsidiary companies so it earns maximum profits
• the subsidiary company does not lose its identity under this system therefore it is still a separate business
• when the goodwill of the holding company is established in the market, it also establishes the goodwill of the subsidiary company before the public

Disadvantages:

• A holding company tries to create a monopoly over the market which may be against the public's interest. This may ruin the image of the company.
• it is expensive to maintain the control of large numbers of subsidiary companies
• the holding company may try to exploit the subsidiary company (for example: the subsidiary company is forced to buy goods at a high price from the holding company and sell their produce at low prices).

Public Corporations

Advantages:

• managed with social objectives rather than solely with profit objectives
• loss-making services might still be kept operating if the social benefit is great enough
• finance raised is mainly from the government

Disadvantages:

• tendency towards inefficiency due to the lack of strict profit targets
• subsidies from government can also encourage inefficiencies
• the government may interfere in business decisions for political reasons, for example by opening a new branch in a certain area to gain popularity.