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Chapter 2

Business Structure
Primary Sector
The first stage of production and includes extractive industries
such as mining, farming, forestry and fishing.

This sector is not very large in the UK economy but is bigger in


some lesser developed economies.
Secondary Sector
This represents the manufacturing and construction
industries.
Tertiary Sector

This represents the service sector (e.g. tourism, accountancy


and music).

This is often the biggest sector in developed economies in


terms of both employment and the value of the output.
The public and private sectors
Businesses that are owned by private individuals
are in the private sector.

Businesses that are government owned are in


the public sector.
The public and private sectors
If a government takes control of a private sector
business this is called nationalization.

If a government sells one of its organizations to


the private sector this is called privatization.
The public and private sectors
Typically the government is likely to run
organizations:
that have a strategic importance to the country, such as
defense, in order to protect the country
that provide essential services such as energy and
water that the government wants to make sure
everyone has access to regardless of income
that individuals may not appreciate how beneficial they
are if left to themselves, such as education and health.
These are called merit goods.
Examples
Nationalization: After the Fall of Saigon in 1975, the
government nationalized nearly all the property in South
Vietnam
All private enterprise was nationalized without compensation
down to the street vendors

Privatization: In 1988, Gorbachev started allowing private


enterprise in the centrally-planned and government-owned
economy of the Soviet Union.
This began a massive privatization of the Soviet economy over
the next few years as the country dissolved.
Other Eastern Bloc countries followed suit after the Revolutions
of 1989 brought them non-Communist governments.
Examples
The extent to which a government intervenes varies from country
to country. This will also change over time.

North Korea
Government decides how resources are allocated
This results in a large public sector and small private sector

U.S.A.
Allows market forces to allocate resources
This results in a large private sector and smaller public sector

Cuba
Government has intervened less in recent years leading to
bigger private sector

Venezuela
Government has intervened more and taken control of many
businesses
The public and private sectors
Public sector organizations can have social
objectives, not just profit objectives
This means they may provide non-profit-making
services such as transport to remote areas
A private sector business would probably not be
interested if there were not enough passengers
The government may provide this service for the
welfare of its citizens
Case Study: Cuba
1. Explain the potential benefits of a centrally planned economy.
Organizations may pursue social objectives rather than profit; may mean
certain goods such as education and health care are available to all; may
provide jobs

2. Discuss the possible reasons why Cuba has moved some way
towards a market economy.
Cuba may have decided that competition is good for efficiency, that the
state system is sometimes inefficient and expensive, that the market
system is better for growth and matching demand and supply. It may
have wanted to open up markets to investment from outside of Cuba to
bring in income
2.2 Legal Structures
Legal Structures
When setting up a business the founders must consider the
appropriate legal form for their enterprise.

These include: sole traders, partnerships, private limited


companies and public limited companies, cooperatives,
franchises and joint ventures.
Sole traders
When individuals run a business on their
own they are known as sole traders.
Plumbers, decorators, window cleaners and
hairdressers are often sole traders.
The people running these businesses work
for themselves.
In some cases, sole traders hire other
people to help them out, but they are the
owners and remain responsible for the
overall business
What does it take to be a successful sole trader?
Must be willing to work on your own
Have confidence in yourself
Have to be used to working hard
Manage stress
High level of self discipline
The Advantages of Being a Sole Trader
Easy to start up
You have no boss
You have the freedom to enter and exit markets
Can make decisions for the business
You get all the rewards (usually in the form of money)
The Challenges of Being a Sole Trader
Can be quite lonely.
Difficult to cope with pressure.
Cant take much time off for holidays and spend time with family.
Difficult to raise financing to set up and expand.
You generally have to rely on debt to get started.
The sole trader also has unlimited liability.
The sole trader is personally responsible for any losses that the
business may have. Sole traders could possibly lose their personal
belongings.
Advantages and disadvantages of being a sole trader

Advantages Disadvantages
Making your own decisions can be Sources of finance are limited.
motivating.
You can make decisions quickly and You rely heavily on your own
respond rapidly to changes in the ability to make decisions.
market.
You have direct contact with the You may work long hours and
market. have
limited holidays, leading to stress.
Setting up is easy. You are subject to unlimited
liability.
Partnerships
If you join with other people and set up a business
together this is known as a partnership.

This is common in professions such as accountancy,


medicine and law.
Partnerships
The benefits of forming a partnership over
being a sole trader include:
you have other people to share ideas with
there are more people to invest in the business and help
finance it
you can benefit from each others specialist skills
you can cover for each other if someone is ill or on holiday.
Partnerships
However, a partnership can present challenges:
You need to consult with others
There may be disagreements over policies/direction
You are dependent on the actions of others. If one of the
partners makes a mistake or brings the partnership into
disrepute, it will have an impact on all the partners.
You are liable for your partners actions, which can be risky.
In most partnerships the partners have unlimited liability,
which means that there is no distinction between the
individuals and the business.
If the business is sued the individuals may lose their
personal possessions.
Partnership Challenges
To reduce risk there might be a Deed of Partnership.
This sets out the rules for the partnership
How profit will be divided
How will you resolve a dispute
Advantages and disadvantages of setting up as a partnership

Advantages Disadvantages
Share resources, ideas and the Share profits
workload
More sources of finance than May disagree over decisions
sole trader
Cover if someone is ill or on Unlimited liability
holiday
Math Moment
You have four other partners in your business. You have
agreed to share profits. If your profits are $240,000 how
much does each partner receive?

$48,000
Companies
To set up a company, the owners have to complete
various documents and register the business at
Companies House.

This process is known as incorporation.

A company is owned by shareholders.


Companies
A company has its own legal identity, separate from that
of its owners.

The company can own property, equipment and other


goods in its own right and is responsible for its own debts.

If the company fails, the shareholders can lose the money


that they invested in the business when they bought
shares, but they cannot lose more than this.
Companies
Shareholders have limited liability.

This means that a company is responsible for the money


it owes but that the personal possessions of its owners
are safe.

This is different from a sole trader, who has unlimited


liability and could lose everything if the business had
financial problems.
Why become a shareholder?

By investing in a company, shareholders become


the owners of the business.

This means that, if the business is successful,


the value of their shares should increase.
Why become a shareholder?
Shareholders should receive some of the profits
that the company makes each year.

The part of the profits paid out to shareholders is


called the dividends.

The more profit a firm makes, the bigger the


dividends are likely to be.
Why become a shareholder?
Shareholders can also influence the policy of the
business.

Most types of shares grant their owners voting


rights.
Private Limited Companies
Have a ltd after their name.

They are owned by shareholders and the owners can place a


restriction on who the shares are sold to in the future.
Public Limited Companies
Have a plc after their names.

Company is owned by shareholders, but unlike private


companies restrictions cannot be placed on the sale of these
share.

Sometimes you will have other companies buy shares of a


business that does not want to lose 51% controlling stake.
When someone is buying the shares and the company doesnt
want to be taken over this is called a hostile takeover.

Shares can also be advertised in the media.


Math Moment
There are 250,000 shares in a company. You have
400 shares. What percentage of the company do
you own?

0.16%
Cooperatives
Cooperative businesses are owned and run by
and for their members
customers, employees, residents

The members of a cooperative have equal


voting rights and so it is a democracy.

Members can often do better by working


together

Sharing the profit is a way to keep it fair and


make it worthwhile.
Employee Cooperatives
Occur when a business is owned equally by all the employees who
work there.

Advantages: motivated employees

Disadvantages: decision making can be difficult, cant sell shares


to people outside the business
Community Cooperatives
Owned by members of a community to provide a local service
such as a post office or pub.
Retail Cooperatives
Several companies operating under one brand name. Can get
better deals from supplier because they are buying in bulk.
Case Study: Cooperative facts and figures

Why do you think the cooperative approach is


so popular around the world?

It appeals to community spirit working


together towards shared goals; it provides more
power than operating individually; it is seen as
democratic (1 member = 1 vote)
Franchise
A franchise occurs when one business (the
franchisor) sells the right to use and sell its
products and/or services to another business
(the franchisee).
The franchisor sells the right to the product in return
for an initial fee and a percentage of the franchisees
turnover.
The franchisee receives the right to the name and the
systems used by the franchisor. This may include
access to materials and training methods.
Franchise
The advantages of buying a franchise:
Because you are joining other franchisees, then as a group
you may have more bargaining power than you would have
on your own.
You have the support of the franchisor and this can help you
with decisions such as pricing, choosing suppliers and
planning ahead.
Buying a franchise may be less risky than setting up
completely on your own.
Franchise
The problems of buying a franchise
The most obvious problem is that it costs you money! This
reduces the profits you make.
Although one of the main benefits of buying a franchise is
that you are linked to other franchisees, this can also be a
problem.
If, for example, the quality of service in other franchisees
falls, it may damage the overall brand and hit your sales as
well.
You become dependent on others and vulnerable if there are
problems elsewhere.
How much should you pay?
Usually there are several types of payments involved
Initial purchase fee + a percentage of turnover each year
Possibly have to make yearly investments for marketing and
management expenses

The amount you pay will depend on:


Likely turnover of the business
The typical profits
Exclusive rights to a particular geographical area
How big is the area? How attractive is it?
The amount of training and support provided
Math moment
A franchisor asks for a $12,000 fixed fee each year plus
2% of profits after this fee and other costs are paid.

Your revenue this year is $650,000. Yours costs (not


including any costs associated with the franchise) are
$420,000. What are the profits this year?

$213,640
Case Study: Toni & Guy
1. Do you think the business model adopted by Toni
Mascolo would be easy for other hairdressers to
adopt?

It could be adopted if the brand was strong and


distinctive assuming there is enough room in the
market for another hairdressing chain.
It may take time to build the brand and will need
expertise and effective decision-making.
Case Study: Franchise
1. Explain why Daily Bread might franchise its business.
Enables faster growth than financing individually; generates
revenues (fee and % of profits); may be more successful as
franchisees may be more motivated due to their stake in the
business.

2. Would you buy a franchise in Daily Bread?


The market seems to be growing; the brand seems well known;
provides some security and reduces risk
Depends on investment and ongoing costs; the degree and quality
of training and support; success of and trust in other franchisees;
other alternatives
Joint ventures
A joint venture occurs when businesses
collaborate on a project but do not formally join
together all their activities.

The benefits of a joint venture are that:


businesses can share skills, resources, expertise and
experience; this can benefit both parties
businesses can collaborate on projects that are
mutually beneficial without having to merge all their
operations.
Joint ventures
However, there may still be difficulties such as:
agreeing on the division of the profits
disagreements over the relative contribution of each
business
different views on how decisions should be made and
what the priorities are
different views of whether and how to end the
venture.
Changing legal structure
Common to go from sole trader to private
limited company (ltd)
Used to raise funds from selling shares
Benefits of limited liability

To operate as a ltd company, a business must:


Have its accounts checked by an independent accountant
(auditor) each year
Publish revenues and profits each year
Publish address of company and names of its directors

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