Unit 1 - Chapter 2 - BUSINESS STRUCTURE

ECONOMIC SECTORS – CLASSIFICATION OF BUSINESS ACTIVITY.

1. PRIMARY SECTOR - Involves the extraction of products in their natural form. Most
products from this sector are considered raw materials for other industries. Major
businesses in this sector include agriculture, agribusiness, fishing, forestry and all
mining and quarrying industries. Primary industry is a larger sector in developing
countries. It’s also known as Extraction Sector

2. SECONDARY SECTOR - Involves the transformation of raw or intermediate materials

into finished goods e.g. manufacturing steel into cars, or textiles into clothing. This
sector generally takes the output of the primary sector and manufactures finished
goods. A builder and a dressmaker would be workers in this sector. It’s also known as
manufacturing sector.

3. TERTIARY SECTOR - Involves the provision of services to other businesses as well as

final consumers. May involve the transport, distribution, wholesaling and retailing,
entertainment, tourism, telecommunication, accommodation, banking etc. The goods
may be transformed in the process of providing the service, as happens in the
restaurant industry. However, the focus is on people interacting with people and
serving the customer rather than transforming physical goods. It’s also known as
services industry.

4. QUATERNARY SECTOR represents organisations that are based on knowledge and the
skills of employees; for example, information service businesses, such as management
consultancies, information technologies and research & development businesses.

REASONS FOR & CONSEQUENCES OF THE CHANGING RELATIVE IMPORTANCE OF

THE ECONOMIC SECTORS.

The growing importance of secondary sector manufacturing industries in developing

countries is called industrialisation. This may be caused by:

(a) The need to add value to primary product to fetch higher prices
(b) Availability of finance to help build manufacturing base.
(c) Growth of multinational businesses that shift production to developing countries
(d) The transfer of technology from developed economies to developing economies.

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 CONSEQUENCES OF INDUSTRIALISATION

BENEFITS PROBLEMS

Total national output (gross domestic • The chance of work in manufacturing can
product) increases and this raises average encourage a huge movement of people
standards of living. from the countryside to towns, which leads
to housing and social problems.
• Increasing output of goods can result in • Imports of raw materials and
lower imports and higher exports of such components are often needed, which can
products. increase the country’s import costs.
• Expanding manufacturing businesses will • Much of the growth of manufacturing
result in more jobs being created. industry is due to the expansion of
multinational companies. These can have a
negative impact on the economy too.
• Expanding and profitable firms will pay
more tax to the government.
Value is added to the country’s output of
raw materials, rather than just exporting
these as basic, unprocessed products.

There is a decline in the importance of secondary sector activity and an increase in the
tertiary sector. This process is termed de-industrialisation.
Causes of de-industrialisation include:
(i) Rising incomes associated with higher living standards have led consumers to spend
much of their extra income on services rather than more goods. There has been
substantial growth in tourism, hotels and restaurant services, financial services and other
services.
(ii) Manufacturing businesses in developed countries face much more competition as a
result of increasing global industrialisation. These rivals tend to be more efficient and use
cheaper labour. Therefore, rising imports of goods are taking the market away from the
domestic secondary sector firms.

Consequences of de-industrialisation include:

(a) Job losses in agriculture, mining and manufacturing industries
(b) Movement of people towards towns and cities
(c) Job opportunities in service industries – tertiary and quaternary sectors
(d) Increased need for retraining programmes to allow workers to find employment in
service industries.

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 PRIVATE AND PUBLIC SECTORS.
1. PUBLIC SECTOR refers to all the businesses and organisations that are accountable to
central or local government. They are funded directly by the government and they tend
to supply public services rather than produce products for a profit. The public sector
provides good and services such as education and healthcare, street lighting, refuse
collection, street cleaning, parks, libraries, swimming pools, emergency services and the
armed services among others. Central government pays for these through taxation.

Public Corporation is an organisation that is owned by the state is known as a parastatal

or public corporation. These organisations fall under the public sector. They are also
known as nationalized industry.

Advantages of Public corporations

 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
 Financed raised mainly from the government.

Disadvantages of public corporations

 There is tendency towards inefficiency due to lack of strict profit targets
 Subsidies from governments can also encourage inefficiencies.
 Government may interfere in business decisions of public corporations for political
reasons.

2. PRIVATE SECTOR is composed of organizations which are owned by individuals and

businesses. This means that they are not owned by, nor part of, the government. All small
businesses, corporations, profit and non-profit organizations, partnerships, charitable
organizations and middle to large entrepreneurships, are considered to be part of the
private sector. The specific examples are retail stores, credit unions, local businesses and
non-government operated banks. An economy with a large private sector compared to
public sectors is known as free market economy. In a mixed economy, Resources are
owned and controlled both by private and public sectors.

The difference between the public and the private sector in terms of the way that they
operate. Those businesses which are in the public sector typically supply services to the
public, and do not compete with any other institution for profit. Businesses in the private
sectors, on the other hand, do have a goal of overtaking their competitors, and
maximizing their profit. The process of selling public corporations to the private sector is

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known as privatization. If a government takes control of a private sector business, this is
called nationalisation.

(a) Define the term ‘private sector’. [2]

(b) Distinguish between the ‘private sector’ and the ‘public sector’. [2]
(c) State two objectives of a private sector business. [2]
(d) Briefly explain two advantages of public sector businesses. [3]
(e) Explain two advantages that a business in the public sector may have that a
business in the private sector may not. [3]
(f) Briefly explain two distinctive characteristics of public sector enterprises (for example
public corporations or nationalised industries). [3]

TYPES OF BUSINESS OWNERSHIP

1. SOLE TRADER
A sole trader is a business that is owned by one person. Sole traders often employ waged
employees, but they alone have to provide all the finance (often savings and bank loans)
and bear all the risks of the business venture. In return, they have full control of the
business and enjoy all the profits. Commonly found in trades where only small amounts
of finance are required to set up and where there are very few advantages to the existence
of larger organizations e.g. construction, retailing, hairdressing, catering.

A sole trader faces unlimited liability for his/her debts i.e. The owners personal
possessions and property can be taken to pay off the debts of the business should it fail.
Sole trader is an unincorporated business - this means that there is no legal difference
between the business and the owner. Many sole traders face the challenge of expansion
due to limited access to additional capital. Others remain small because the owner wishes
to remain in control of the business.

Advantages of setting up as a sole trader business:

 Total control of the business by the owner and not answerable to anybody else.
 Cheap and easy to start up – few forms to fill in and to start trading the sole trader
does not need to employ any specialist services, other than setting up a bank account
and informing the tax offices.
 Keep all the profit – as the owner, all the profit belongs to the sole trader.
 Business affairs are private – competitors cannot see what is earned, so they will know
less about how the business works and how it succeeds.
 Able to choose times and patterns of working.
 Business may be based on the interests or skills of the owner.

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Disadvantages of a sole trader business are:
 Unlimited liability - sole trader is fully liable for any debts that the business incurs. In
case of the business being in debt, the personal possession is sold to pay the debts in
addition to the money put in the business.
 Can be difficult to raise finance, because they are small, banks will not lend them large
sums and they will not be able to use any other form of long-term finance unless they
change their ownership status.
 There is a problem of continuity if the sole trader retires or dies – what happens to the
business next?
 Can be difficult to enjoy economies of scale, i.e. lower costs per unit A sole trader, for
instance, may not be able to buy in bulk and enjoy the same discounts as larger
businesses.
 Owner is responsible of all aspect of management and may work for long hours to
make business pay.
 Intense competition from bigger firms

The risk of losing investment and personal property often puts potential sole traders off
setting up businesses, but also makes them consider the other forms of business structure.

2. PARTNERSHIP
To overcome many of the problems of a sole trader, a partnership may be formed. A
partnership is an association of two or more people formed for the purpose of carrying
on a business generally there will be between 2 and 20 partners.
Each partner is responsible for the debts of the partnership and therefore the needs to
choose partners carefully and draw up an agreement on the responsibilities and rights of
each partner (known as a Deed of Partnership or The Articles of Partnership).
These documents provide agreement on issues such as
- profit and loss sharing ratios,
- capital contribution of each partner
- management role of partners
- Entitlement to receive salaries and other benefits in kind (e.g. cars, health
insurance)
- Interest on capital (the amount invested in the partnership)
- Arrangements for the introduction of new partners
- Arrangements for retiring partners
- What happens when the partnership is dissolved etc.

The most common examples of a partnership are doctor's surgeries, veterinarians,

accountants, solicitors and dentists.

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 Most partners in a partnership have unlimited liability for their debts. The only exception
is in a Limited Partnership. This is where a partnership may wish to raise additional
finance, but does not wish to take on any new active partners. To overcome this problem,
the partnership may take on as many Sleeping (or Silent) Partners as they wish - these
people will provide finance for the business to use, but will not have any input into how
the business is run. In other words, they have purely put the money into the business as
an investment. These Sleeping Partners face limited liability for the debts of the
partnership. A partnership, just like a sole trader, is an unincorporated business.

ADVANTAGES OF PARTNERSHIPS DISADVANTAGES OF PARTNERSHIPS

Partners may specialize in different areas Unlimited liability
of business management
Shared decision making Profits are shared.

Additional capital injected by each partner Not possible to raise capital from selling
shares.
Business losses shared between the Business has no continuity – has to be
partners reformed in case of changes in number of
partners.
Greater privacy and fewer legal formalities Loss of independence if business was a
than companies sole trader.
Partners are bound by the decisions of any
one of them.

(a) Define the term ‘sole trader’. [2]

(b) Define the term ‘partnership’. [2]
(c) Outline two advantages that a partnership might have over a sole trader. [3]
(d) State three problems of operating as a sole trader. [3]
(e) Outline two advantages that a partnership might have over a sole trader. [3]
(f) Analyse the advantages of a partnership as a legal structure for the owners of a small business.
[8]
(g) Discuss whether a partnership is the best legal structure for an accountancy business. [12]

3. LIMITED COMPANIES.
A limited company is a business that is owned by its shareholders, run by directors and
most importantly whose liability is limited. A share is a unit of a capital of a company. A
shareholder is a person or institution owning shares in a limited company. A share
certificate confirms part ownership of a company.

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Features of a limited company.
- Limited liability means that the investors can only lose the money they have invested
and no more. This encourages people to finance the company, and/or set up such a
business, knowing that they can only lose what they put in, if the company fails. For people
or businesses who have a claim against the company, “limited liability” means that they
can only recover money from the existing assets of the business. They cannot claim the
personal assets of the shareholders to recover amounts owed by the company. The
greater risks of the company failing to pay its debts in now transferred from investors to
creditors

- Legal personality: - The law confers life on the business as a "separate legal person".
Profits and losses are the company's and it has its own debts and obligations. It can be
sued or sue in a court of law, sign a contract or even make an agreement with another
party. The company is a separate entity/identity from the owners. The company is an
‘artificial person’ with the rights of a human being. A company is therefore an
incorporated business.

- Continuity – The Company continues despite the resignation, death or bankruptcy of

management or shareholders. Any change in the number of shareholders does not lead
to dissolution or break up of a company. Ownership continues through the inheritance of
the shares.

TYPES OF LIMITED COMPANIES.

A) PRIVATE LIMITED COMPANY (LTD)
This is a type of joint-stock company it is an incorporated business - where the business
has a separate legal identity from the owners. Often private limited companies are small,
family run businesses which are owned by shareholders.

Each shareholder in a private limited company MUST be a part of the business and under
no circumstances can any shares be sold to members of the general public. Each share
entitles the owner to one vote at the company's Annual General Meeting (A.G.M.) and
also to the company's profit at the end of the financial year (a dividend).

Each shareholder has limited liability for the company's debts and can, therefore, only
lose the value of their investment in the company. A company is run by a Board of
Directors (who are elected by the shareholders) and this is headed by a Chairman. It can
be very difficult for a shareholder in a private limited company to sell their shares, since a
buyer must be found within the framework of the company. The company's name must
finish with the word Limited or Ltd or Pty in some countries.

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 (a) Define the term ‘private limited company’. [2]
(b) Define the term ‘limited liability’. [2]
(c) Briefly explain two possible disadvantages to a sole trader of changing to a private
limited company. [3]
(d) Briefly explain two advantages (other than limited liability) a private limited company
has over a sole trader. [3]

B) PUBLIC LIMITED COMPANY (PLC)

This is the other, much larger, type of joint-stock company it is an incorporated business,
run by the Board of Directors on behalf of the shareholders and has an A.G.M. at which
shareholders vote on certain key issues relating to the company. They are recognized by
the use of ‘plc’ or ‘Inc.’ after the company name. The main difference between a PLC and
a private limited company is that a PLC can sell its shares on the Stock Exchange to
members of the general public and can, therefore, raise significantly more finance than a
private limited company.

The price of the shares will then fluctuate according to investors' perceptions of the PLC.
It is often the case with a PLC that the owners of the company (shareholders) will wish the
PLC to make as much profit as possible, so that the shareholders will receive a very
handsome dividend per share. However, the Board of Directors and the management will
often wish to devote some of the PLC’s resources to growth and diversification (such as
the introduction of new products) and this will clash with the shareholders' desire for
maximum profits – short terms gains (short-termism). This conflict is as a result of divorce
of ownership and control.

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A PLC has to publish its annual accounts known as disclosure of accounts and therefore
is extremely vulnerable to investors' and bankers' perceptions about its progress and
success. Following on from this, a PLC is also at risk from a takeover from an outside body,
if they manage to accumulate over 50% of the shares in the PLC.

ADVANTAGES OF PLC’S DISADVANTAGES OF PLC’S

Limited liability for shareholders and There are many legal formalities in
directors. formation and this leads to High cost of
business consultants and financial advisers
when setting up the company.
Separate legal identity Share prices are subject to fluctuation.
Continuity Risk of takeover due to availability of
shares on the stock exchange.
Easy of buying and selling of shares for Disclosure of information.
shareholders – this encourages investment
in plc’s.
Access to substantial capital sources due Directors are influenced by short term
to ability t issue a prospectus to the public objectives of major investors.
and to offer shares for sale called flotation.

(a) Define the term ‘public limited company’. [2]

(b) State two features of a ‘public limited company’. [2]
(c) Briefly explain two advantages a public limited company has compared to a private
limited company. [3]
(d) Briefly explain one advantage and one disadvantage to a business of operating as a
public limited company, rather than as a private limited company. [3]
(e) Analyse the strengths and weaknesses of a ‘public limited company’ legal structure
for business. [8]

4. FRANCHISES
A franchise is where a business sells the right to set up another business using its name.
Examples of major franchises are: McDonalds, Holiday Inn, Domino’s Pizza & Coca-Cola.

The franchisor is the business whose sells the right to another business to operate a
franchise – they may run a number of their own businesses, but also may want to let
others run the business in other parts of the country. The franchisee has a licence to trade
under the franchisor's name and also to use the logos, trademarks, etc. the licence that
the franchisee buys is usually restricted to a specific geographical area and for a limited
period of time.

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A franchise is bought by the franchisee – once they have purchased the franchise they
have to pay a proportion of their profits to the franchiser on a regular basis. Depending
on the business involved, the franchiser may provide training, management expertise and
national marketing campaigns. They may also supply the raw materials and equipment.
The franchisee separately decides which form of legal structure to adopt.

The advantages of being a franchisor:

 Large companies see it as a means of rapid expansion with the franchisee providing
most of the finance.
 If the franchise model works, then there are large profits to made from selling
franchises royalty payments, selling raw materials and equipment.

The advantages of setting up as a franchisee are:

 The franchisee is given support by the franchiser. This includes marketing and staff
training. So starting a business in this way requires less expertise and is less lonely!
 The franchisee may benefit from national advertising as it is paid for and being part of
a well-known organisation with an established name, format and product.
 Advice and training offered by the franchiser.
 Supplies obtained from established and quality-checked suppliers.
 A franchise allows people to start and run their own business with less risk. The chance
of failure among new franchises is lower as their product is a proven success and has
a secure place in the market.
 Franchiser agrees not to open another branch in the local area.

The disadvantages of setting up as a franchisee are:

 Initial franchise licence fee can be expensive. Cost to buy franchise – can be very high.
 Have to pay a percentage of profit/ sales revenue to the business franchiser the royalty
must be paid to the franchisor even if a loss is made.
 Have to follow the franchise model, so less flexible - are told what prices to set, what
advertising to use and what type of staff to employ. This reduces the owners control
as well as reducing room for initiative.
 Vulnerable as overall brand may be damaged due to problems in a franchise located
elsewhere.
 No choice of supplies or suppliers to be used.
 Local promotions may still have to be paid for by franchisee.

However, the royalty must be paid to the franchisor even if a loss is made and the
franchisee can have strict restrictions placed on their actions and promotions within the
store, not leaving the franchisee much room for initiative and flair.

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 (a) Define the term ‘franchise’. [2]
(b) Briefly explain two benefits for an entrepreneur of becoming a franchisee. [3]
(c) Analyse the advantages to an entrepreneur of purchasing a franchise to start a
business. [8]
(d) Explain the advantages for a franchisee of a ‘franchise’ as a form of business. [8]
(e) Discuss why an entrepreneur might choose to become a franchisee rather than start
an independent restaurant business. [12]
(a) ‘The purchase of an internationally recognised fast food franchise guarantees business
success.’ Discuss this view. [12]

5. CO-OPERATIVES
Co-operative businesses are owned and run by and for their members, whether they are
customers, employees or residents. The members of a co-operative have one vote each
and so it is a democracy. Members, such as farmers or freelancers, tenants or taxi drivers,
can often do better by working together. Sharing the profit is a way to keep it fair and
make it worthwhile.
TYPES OF CO-OPERATIVES:
 Retail co-operatives – Sell goods and services to members.
 Marketing or trader co-operatives – Sells products on behalf of members.
 Worker co-operatives – Employees from the same kind of work come together and
form an organisation to help them. Such cooperatives help members to save and
access loan at ease.

The objectives of a co-op tend to set them apart from other businesses. The objectives
are normally more focused on the members of the co-operative and community. Though
profits are required to enable them to reinvest in their business, they will not be a primary
objective.

Features of cooperatives - Profits are shared equally among members, all members have
one vote at important meetings, members can contribute to the running of the business,
sharing workload and responsibilities etc.

(a) Employee co-operatives These occur when the business is owned equally by all the
employees who work there. Each employee has a vote in the business decisions and shares
in the profits. The advantage of this is that employees may be more motivated to make
the business a success because they are part-owners. One of the problems, however, is
that decision-making may be difficult if everyone has an equal vote but disagrees. Also,
you cannot sell shares to those outside the business to raise finance, which might limit
access to funds.
(b) Community co-operatives - These are owned by members of a community to
provide a local service, such as a post office.

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 (c) Retail co-operatives - These occur when independent retailers join together. A group
of independent stores may come together and operate under one brand name. This
means they can get better deals from suppliers by buying in bulk and can share marketing
costs.

Problems faced by cooperatives in their operation:

 The system of one member one vote in some societies means a long and slow
decision-making process.
 Co-operatives may find it difficult to raise finance since banks are not so willing to lend
them money because their main aim is not to make a profit.
 Poor management skills unless professional managers are employed.

(a) Explain the benefits of a co-operative to its members. [5]

(b) Analyse the advantages of a co-operative as a legal form of business. [8]
(c) Explain the advantages of a ‘co-operative’ as a form of business. [8]
(d) Explain the strengths and weaknesses of a ‘co-operative’ legal structure for business. [8]

6. JOINT VENTURE
Joint venture is a situation where two or more businesses agree to work closely together
on a particular project and create a separate business division to do so. They can lead to
mergers of the businesses if their joint interest coincide and if the joint venture is
successful. The reasons for joint venture are:
 Costs and risks of a new business venture are shared especially when the cost of
developing new products is rising rapidly.
 Different companies might have different strength and experiences and they 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.

Risks of joint ventures include;

 Styles of management and culture might be too different that the two teams do not
blend well together.
 Errors and mistakes might lead to one blaming the other.
 The business failure of one of the partners would put the whole project at risk.

(a) Define ‘joint venture’. [2]

(b) Briefly explain two advantages of joint ventures to the businesses involved. [3]

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7. SOCIAL ENTERPRISES
Social enterprises are businesses which are operated for a social purpose. Most of their
profit is used to benefit society. Most social enterprises have these common features:
(i) They directly produce goods or provide services.
(ii) They have social aims and use ethical ways of achieving them.
(iii) They need to make a profit to survive as they cannot rely on donations as charities do.

Social enterprises compete with other businesses in the same market or industry. They
use business principles to achieve social objectives. They may include community
enterprises, credit unions, trading arms of charities, employee-owned businesses, co-
operatives, development trusts, housing associations, social firms, and leisure trusts.
Briefly explain two aims of a social enterprise. [3]

THE ADVANTAGES AND DISADVANTAGES OF CHANGING FROM ONE TYPE OF

BUSINESS OWNERSHIP TO ANOTHER.
In discussing the above issues, the following points guide the discussion.
1. Access to capital.
2. Legal identity status including limited/unlimited liability changes.
3. Loss of control including risk of takeover and change in decision making process
4. Privacy concerns – publishing final accounts.
5. Sharing of profit/loss
6. Legal costs and formalities.

References:
1. P. Stimpson and A. Farquharson (2021) Cambridge International AS and A-level Business 4th edition
Cambridge university press.
2. M. Surridge and A. Gillespie (2021) Cambridge International AS and A-level Business 2nd edition by
Hodder education.
3. I. Marcouse, A. Hammond, N. Watson (2019) Pearson Edexcel A-level Business by Hodder education.

Compiled by J. Musyoka.

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