CHAPTER 2 BUSINESS STRUCTURES

COMPARE AND CONTRAST:

i) A sole trader and a partnership

ii) the private sector and the public sector

i) A sole trader is an individual who owns and operates a business. They have very limited amounts
of capital and they rely on the own personal commitments for the success of the business.
They have unlimited liability which means the owner is responsible for all of the firm's debts.
It is cheap to set up as sole trader as there are few legal requirements required.

i) A partnership is owned by two or more people. It is also easy to set up without much legal procedures
except for drawing up a partnership agreement amongst the partners. It can have two or more owners
who share the responsibilities of the business and can contribute according to their individual expertise.
They have better financial resources as there might be a few partners who can contribute if there is short
of funds. Like sole trader, they also have unlimited liability.

Many people who does not have the financial resources to start their own business, go into partnership
as a way of acquiring the necessary capital, without having to procure a loan.

USING EXAMPLES, EXPLAIN THE FOLLOWING TERMS:-

i) Primary Sector
ii) Secondary Sector
iii) Tertiary Sector
iv) 'Not for Profit' Sector

In the primary sector raw materials are produced, grown or extracted from the earth. These include mining
i)
( gold, copper and coal), agriculture , fishing and forestry.

The secondary sector is part of the economy concerned with the manufacture of products. It uses the
end products of the primary sector as its raw materials and transforms them to finished products. For
ii)
example, a furniture manufacturer would use wood, metal, leather and plastic to produce final goods
such as chairs, tables and beds.

Tertiary Sector is part of the economy comprising of businesses that supply services such as insurance,
iii) transport and banking.

The 'Not for Profit' does business for the welfare of the general public and the shareholders have no motive
for profit. This sector mainly exists for charitable, public safety and education reasons and its shareholders
or trustees do not benefit financially. They have income from membership fees and donations but they use
their income and profits for the purposes of the club , society or charity and not paying dividends to
iv) shareholders. This type of organisation uses its fund to achieve its goals. Examples ,Association of
Bankers,UK Trade Associations, Association of Travel Agents uses the money for its members.
The Hospice and Charitable organisations uses the funds to help the sick, poor or disabled people.

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Outline the advantages and disadvantages of a sole trader

The main advantages of a sole trader are
A sole trader is easy to form as it can be established with minimum formalities as there are few legal

Procedures and the cost of setting up is cheap
The owner has full control of the business; no need to consult with others about decisions
The business can respond flexibly to market changes and customer's demands as decisions can be taken

quickly
All profits go the owner / proprietor
Personal supervision means sole trader has better customer relations

The main disadvantages of a sole trader are

Finance is usually limited to any money the owner can provide
The sole trader has unlimited liability, if the business gets in trouble, the owner stands to lose everything

including his personal assets.
Lack of finance may prevent the business from reaching a viable size (cannot expand)
The firm depends on the sole proprietor, so there may be problems in taking holidays or if the owner is ill,

and the business is likely to cease with the death of the owner
The sole trader has limited expertise and depend on himself for skills and abilities of one person
Banks are less likely to give loans to sole trader

Outline the advantages and disadvantages for a sole trader in forming a partnership

The main advantages of a partnership are

Like sole trader, partnerships are easy to form
Responsibilities of managing and handling the business can be divided among the partners.
More capital can be introduced into the business by adding new partners
Decision making can be shared
When one partner is ill or on holiday, the other partner can substitute for him
Business risks can be reduced and distributed among the partners
A lot of ideas, talents, skills can be pooled together for better management

The main disadvantages of a partnership are

The partners have unlimited liability and are are responsible for all debts
The withdrawal or death of a partner may dissolve the firm
Decision making can be slow as all partners must agree to a decision made
A management problem may arise if too many partners have a say in the business

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 CHAPTER 2 BUSINESS STRUCTURES

Outline the advantages and disadvantages for a partnership of becoming a private

limited company (Ltd).

The main advantages of a private limited company

Ability to raise more capital by issuing shares

The extra funds can be used for expansion and for increasing the market share
Private Limited Company has limited liability as the firm is a separate legal entity and as such

the owners are only liable for the capital invested in the business
As a private limited company is bigger, it can take advantage of the economies of scale from s
savings in purchasing as they can buy in bulk and the owners can secure better credit terms
and also able to negotiate discounts for the buying in bulk.
It is easier for private Limited company to get loans from bank
It has greater potential for expansion

The main disadvantages of a private limited company

Costly to set up with all the legal procedures

By selling shares to people outside, the ownership is diluted and there are more 'stakeholders'

who will expect a share of the profits
A private limited company must have its accounts audited and submitted to the Companies House
and this will incur extra costs and also means that the general public will have access to the financial
status of the business.
A private limited company must follow the legal guidelines about holding an annual general meeting

of share holders and publishing annual accounts.

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A partnership agreement is a written document that states all the terms of operating the partnership by
spelling out the partner's rights and responsibilities. Although not required by law, it is wise to consult a
lawyer to draw up the agreement. A partnership agreement addresses issues such as division of profits,
decision-making authority, expected contributions, dispute resolution and provisions for buying or selling
of partnership interest in case a partners leaves or dies.
A Private limited company can be owned by two or more shareholders and its owners are legally separated
from the business. It must be registered as a legal enterprise. It must have at least one director and two is
the Company Secretary is a director. Many private limited companies ate family businesses. The main
documents are the Memorandum of Association which has the objectives of the company, powers of
directors, its capital, name, issue and transfer of shares and other internal matters.
Shares in private companies can only be traded with the agreement of the shareholders and they cannot
be offered to the general public

A Public limited company sells shares to the public. It must have at least two directors and seven
shareholders. A public limited company produces a prospectus setting out the terms on which it offers
its shares and the history of the firm and its prospects. The shareholders have limited liability; owners
are legally separated from the business.
Shares in public limited companies can be offered to the general public and freely traded on stock exchange

Outline the advantages and disadvantages of a Public Limited Company

The main advantages of a Public limited company (PLC)
1- The shareholders have limited liability and they cannot be sued for the actions of the company
2 - The company can raise capital by issuing shares or debentures
3- Easy to get loan from bank
4 - A board of directors with expertise/experience can be appointed
5- Shareholders can sell/transfer their shares easily
6 - It has greater potential for expansion
7 - The shareholders , directors, employees may retire or die but the company lives on

The main disadvantages of a Public limited company (PLC)

1- Costly to set up with all the legal procedures
2 -There is loss of ownership
3 -There is a loss of control of the business
4- Decisions take longer and there may be disagreement which can lead to slow response to change
or new opportunities
5- More statutory regulations to conform
6 -Profits are shared amongst a far greater number of people
7 -Public disclosure of the financial accounts
8 - Public companies are vulnerable to take-over bids from rivals who make an offer to buy their shares

The main difference between private limited companies and public limited companies (PLC) are
as follows:

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 CHAPTER 2 BUSINESS STRUCTURES
1 - Shares in private companies can only be traded with the agreement of the shareholders and they cannot
be offered to the general public

2 - Shares in public limited companies can be offered to the general public and freely traded on stock
Exchange

3 - A private company must have at least two shareholders while a public company must have at least seven
4 -A private company must have at least one director (two if the Company Secretary is a Director) and
a public company must at least two directors

5 - In general private companies are smaller businesses with much less capital than public company

Merit Goods are goods that society thinks everyone should have and will be under-consumed if lef
to the free market economy. The government, therefore either subsidies the goods and services or
provides them free e.g healthcare, education , public libraries, museums, innoculations and etc. It
is provided whether the individual thinks there is any benefit derived from them.

Public Goods are those goods provided by the government and shared by the public and
cannot be provided to paying users without non-payers using them, like street lighting, armed forces,
police and public parks.

Ordinary Shares receive a dividend determined by the Board of Directors according to the size of the
profits. Their dividend can be high, low or no dividend in a year depending on the profits. Ordinary
shareholders are owners of the company and each share entitled them to one vote at the company
meeting.

Preference shares receive a fixed rate of dividend before any class of shareholder is paid. Some preference
shares have the benefit of being cumulative which means any unpaid dividends can be carried forward until
there is enough profit to cover the dividend.

Types of Business organisations

1 Unincorporated Business, where there is no legal distinction between the owners and their business;
the personal assets of the business owners and the assets of the business are treated as one. This means
that if an unincorporated business runs into financial difficulties and not able to pay debts, the creditors can
ask the owners to pay for their debts; their liability is unlimited. This is the case with sole traders and
partnerships

2 Incorporated Business, the business owners and the business itself are legally separated. The personal
assets of the owners are treated as distinct from the business assets they own. This is the case with Private
Limited companies and Public Limited companies. The owners of the incorporated businesses are
shareholders in that business. Shareholders enjoy limited liability i.e the individual liability is limited to
their shareholding or the money they invested. This means that if an incorporated runs into financial
difficulties and not able to pay debts, the creditors cannot ask owners to pay over their shareholding or the
money they have invested. Shareholders of incorporated companies have lesser risk.

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