2.

Business Structure
 Levels of business activity

The Primary Sector: The primary sector includes all those activities the end
purpose of which consists in exploiting natural resources: agriculture, shing,
forestry, mining deposits. The materials are then used by secondary sector
businesses as raw materials to produce nished goods.

The Secondary Sector: The secondary sector consists of processing,

manufacturing, and construction companies. The secondary sector produces
goods from the natural products within the primary sector. Examples include
manufactures of cars, processed food, clothes etc.

The Tertiary Sector: Businesses provide various services to consumers or other

businesses such as hotel accommodation, travel guidance, web designing,
accounting services, banking and so on.

The quaternary sector of the economy is based upon the economic activity that is
associated with either the intellectual or knowledge-based economy. This consists
of information technology; media; research and development; information-based
services such as information-generation and information-sharing; and knowledge-
based services such as consultation, education, nancial planning, blogging, and
designing.

Public vs Private Sector

Public sector: comprises organization’s accountable to and controlled by central
or local government (the state). Businesses in the public sector may not have
pro t as an objective. Some industries such as water, health, education and
defence are taken over by the government for fair allocation as they are highly
signi cant resources.

Private sector: comprises of businesses owned and controlled by individuals or

groups of individuals. The private sector is driven by the pro t motive which makes
it more e cient than the public sector and also encourages innovation as a result
of competition. The free market economies have a large private sector.
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 Legal structures in private sector
1. Sole Trader (One owner)
Sole trader is an individual who owns and runs a
business, taking all responsibility of nal decisions. The
owner of a sole treader has unlimited liability and few
administrative or legal requirements. The business is not
a separate legal entity. While some businesses may be
large, most sole traders run small businesses with fewer
employees and lesser revenue.

Advantages of being a sole trader

• Cheap, quick, and easy to set up due to lesser legal
and administrative requirements.
• Owner controls the business and has confidentiality.
• Flexibility in the business according to owners’ liking.
• Better customer service in terms of catering to one-o requests.
• The owner can use a USP to develop the business.
• There is no need to disclose nancial accounts.

Disadvantages of being a sole trader

• Unlimited liability
• Di cult to raise nance from loans and shares cannot be sold.
• Demands that the owner be skilled at all aspects of business operation.
• Di cult for the owner to be absent from the business — no sick leave.
• If the owner dies, the business also shuts down with him.
• Di cult to bene t from economies of scale, hence di cult to provide a
competitive price.
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Partnership (More than one owner)
A Partnership is when two or more people own and run a business. Partnerships
generally have unlimited liability and are not legal entities, so individual partners
have legal responsibility. They jointly own and run the business and share capital,
responsibilities and pro ts.

Advantages of a partnership
• Easy and cheap to set up.
• More capital-raising ability with extra partners.
• Possibility of ‘sleeping partners’ to raise finance.
• Shared responsibility, workload, and stress.
• Wider range of skills.
• Partners specialize in di erent areas of management and share expertise.
• Easier to raise nance as two businesses can inject capital into the business.
• Discretion of nancial accounts.
• Losses are also shared preventing burden on either party.

Disadvantages of a partnership
• Unlimited liability restricts ability to raise capital and partners may be forced
to use personal assets to pay business debts.
• Slower decision making and less control for individuals.
• Possible arguments about work arrangements and share of profits.
• Partnership nishes if one partner leaves, so no continuity.
• It might be di cult to raise nance as shares cannot be sold.
• There can be loss of independence for a sole trader if it converts to a partnership.
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 Limited Company
Private and public limited companies share the following features:
• Incorporation: the company is a separate legal entity from the owners and can
sue and be sued.
• Ownership through share issue and can be sold.
• Limited liability of owners.
• Management is by a board of directors elected by the shareholders.
• Setting up requires formal registration, regular ling of accounts and reports
open to the public.
• Limited liability and share issue enable large amounts of capital to be raised.
• Continuity

• This means that limited companies are more expensive to set up but have
access to greater sources of capital, are seen as more secure and continue until
wound up or taken over.

Limited and Unlimited Liability

Limited Liability
Concept: Limited liability protects business owners by limiting their personal
nancial liability to the amount invested in the business. Personal assets are
shielded from business debts and legal actions.
Importance: Limited liability encourages entrepreneurship and investment by
reducing the risk for business owners. It allows businesses to attract external
investors and promotes economic growth by fostering a safer environment for
business endeavors.

Unlimited Liability
Concept: In unlimited liability, business owners are personally responsible for all
the business debts and liabilities. Their personal assets, including home and
savings, can be used to cover business debts.
Importance: Unlimited liability provides simplicity for small businesses and sole
proprietors, but it exposes owners to signi cant personal nancial risk. The
importance lies in the direct link between personal assets and business debts.
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 Legal formalities in setting up company
Articles of Association: this document covers the internal workings and control of
the business for example, the names of directors and the procedures to be
followed at meetings will be detailed.

Memorandum of Association: this states the name of the company, the address
of the head of ice through which it can be contacted, the maximum share capital
for which the company seeks authorization and the declared aims of the business.

Private limited company

A private limited company is a small to medium sized business whose owners or
shareholders are often members of the same family. The existing shareholders can
only sell their shares with the agreement of other owners. However, shares of the
company cannot be sold to the general public, rather family members or close
friends.

Advantages Disadvantages

Unlike a public limited company, it There may be cases where family

may be cheaper to set up and not all and friends do not buy shares and
accounts have to be disclosed to the there is di culty in raising capital
public and some discretion can be as they cannot sell shares on the
maintained. stock exchange.
Limited liability protecting Financial accounts may have to be
shareholder’s personal assets sent for inspection.
There can be ease and increase in
capital as it can be raised by friends
and family by selling shares

The owner can maintain control by

deciding who to sell shares to.

The business does not die with the

death of an owner.

Public limited company: Public limited companies (PLCs) are large businesses
which have the legal right to sell shares to the general public. The share prices are
quoted on the stock exchange. Shareholders elect directors at annual general
meetings (AGMs) who often own large volumes of shares in the business and
manage and control major decisions.
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 Advantages Disadvantages
The business may incur high costs of
Limited liability of shareholders consultants and advisers when it is set
up.
Easier to buy and sell shares on the stock There may be prolonged legal
exchange formali es to set up the business.
Having a greater company status will The nancial accounts are open to
encourage more investors and increases everyone including the shareholders
access to better credit purchases and and general public and compe tors
suppliers may take bene t from it.
Large amount of capital is raised as shares
can be sold to the general public and this There is fear of takeover as the shares
capital could be invested in important are open to sale for general public.
aspects such as R&D, marke ng etc.

Cooperative
A cooperative is an association of people united voluntarily to meet their common
economic, social and cultural needs and aspirations through a jointly owned and
controlled business. Members may be consumer-based, worker-based or
producer-based.

Advantages

• All members contribute to the running of the business and important decisions.

• Members combine their knowledge and expertise

• Tasks and responsibilities are more shared preventing too much workload on
each worker enabling them to perform at their fullest potential.
• As members share a common goal of equal pro ts, there may be greater
chances of e ective communication and cooperation.
• All members have one vote
• Pro ts shared equally among members

Disadvantages
• Member may not be skilled enough especially lacking managerial skills.
• Capital cannot be raised by issuing shares to general public
• Slow decision-making process as all members must agree to one decision
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Options for further business expansion

Franchise
A franchise is a legal agreement to use the brand
name and logo of a much larger, well-established
business (franchisor) and a smaller business that
uses the advantages of a large well-known brand in
return for payment. The franchisor often supplies a
name, logo and generic marketing, and lays down
conditions for the product. The franchisee supplies
the premises, equipment and sta . Examples
include fast food chains such as McDonald’s. The
franchisee must meet the product standards set by
the larger business.

The franchisee gets:

• Access to a successful marketing model and product
• It may be easier to form a customer base as franchisee will be associated with a
larger brand, however it may need to pay for local promotion on its own.
• There are lesser chances of failure due to having the name of a popular brand,
however a share of the pro ts has to be paid to the franchisor.
• There are high quality products as franchisor provides the suppliers, however
there can be high costs of setting up due to initial franchise license fees.
• Training and equipment is provided by the franchisor
• Guaranteed supplies
• Regional and international marketing. However the franchisee has to undertake
local marketing initiatives themselves.

The franchisor gets:

• Guaranteed regular income, assuming the success of franchises
• Access to local knowledge could lead to better product, catering to local
customer preferences, but brand name could be damaged if a franchise is
poorly run
• Control over nal product, but high cost of monitoring and coordination
• There may be a risk of possible damage to the brand reputation if franchise is
poorly run for e.g. poor customer service or bad quality product.
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 Joint Ventures
When two or more businesses work together on a
particular project, such as building a bridge. They may
do this by sharing sta , capital and experiences as well
as knowledge but keep their own identity. Or they may
set up a new jointly owned and controlled business for
the purpose of carrying out the project. Joint ventures
often last only for the duration of the project. For the
success of the joint venture, it is essential for the
businesses to have synergy.

Advantages of Joint Ventures

• Access to new segments and distribution networks

• Increased capacity and scale of production.
• Sharing of risks and costs (i.e. liability) with a partner.
• Access to new knowledge and expertise, including specialised staff.
• Increase in productivity and pro ts due to access to greater resources, for
example technology and nance.
• Company strengths are merged which o set the weaknesses of both the
businesses.

Disadvantages of joint venture

• Objectives of the venture are unclear.

• Communication between partners or sta management may have obstacles.
• Level of expertise and investment isn't equally matched.
• Work and resources aren't distributed equally.
• Uneven contributions may lead to increased conflict.
• Increasing con icts will lead to greater costs, delayed operations, and
ine ciency overall in the business.
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 Star Alliance
Star Alliance is a group of major airlines that work together to make travel easier.
Founded in 1997, it includes airlines like Lufthansa, United Airlines, Air Canada,
and Singapore Airlines. Each airline keeps its own brand but cooperates with the
others. The main o ce is in Frankfurt, Germany. Star Alliance's goal is to improve
international travel for passengers.

Advantages of Star Alliance

• O ers a wide network of destinations worldwide, making travel more
convenient for passengers.
• Airlines share resources like airport lounges and maintenance services,
which helps reduce costs.
• Provides smooth travel experiences with coordinated ight schedules,
check-in processes, and baggage handling.
• Expands the market presence and visibility of member airlines globally,
attracting more customers.
• O ers uni ed rewards programs across all member airlines, bene ting
frequent travelers.

Disadvantages of Star Alliance

• Managing the operations of many di erent airlines can be di cult.
• Ensuring consistent service quality across di erent airlines can be
challenging.
• Member airlines may face restrictions on some strategic decisions to keep
the alliance running smoothly.
• Reliance on alliance agreements can limit the ability of airlines to make
independent decisions.
• There can be disagreements among member airlines about routes, services,
and pricing.

Holding Company

A holding company is a type of business that owns enough voting stock in other
companies to control their policies and management. The primary purpose of a
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 holding company is to control other companies, which are called subsidiaries. A
holding company itself usually does not produce goods or services but exists to
manage its investments in other companies.

Advantages of Holding Company

• Can control a company by owning a majority of its stock, often with a

smaller investment than if it were to acquire the company outright.
• Can spread risk by owning a variety of businesses in di erent industries,
which can protect against industry-speci c downturns.
• May receive tax advantages, such as being able to o set losses in one
subsidiary against pro ts in another.
• Can streamline operations by centralizing management and administrative
functions.
• Can easily acquire and dispose of subsidiaries to respond to market
changes and strategic opportunities.

Disadvantages of Holding Company

• Managing multiple subsidiaries can be complex and may require signi cant
resources and expertise.
• Maintaining the holding company and managing various subsidiaries can be
expensive.
• Con icts can arise between the holding company and its subsidiaries,
especially if the interests of the two are not aligned.
• May face increased regulatory scrutiny and compliance requirements,
especially if it operates in multiple jurisdictions.
• Often has limited involvement in the day-to-day operations of its
subsidiaries, which can lead to a lack of oversight.
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Social Enterprise
A social enterprise is a business whose pro ts are reinvested to achieve these
goals in ethical ways rather than used to maximise gains of shareholders. It
might have social or environmental objectives.

The triple bottom line

A social enterprise has three main aims; economic, social and environmental.
An economic aim is to make pro t and while maximizing bene ts to society
and the environment, and the pro ts are principally used to fund social
programs. A social aim is to support disadvantaged communities by providing
them with employment and training. An environmental aim was to protect the
environment by producing in ethical ways, disposing o waste responsibility,
minimizing pollution etc

Examples of some work done by social enterprise:

• Improving the environment by clearing and recycling waste,
• Increasing employment for women.
• Providing low cost services to charities or NGOs
• Providing training and employment to recovering drug addicts
• Buying from ethical suppliers, using environmentally friendly ways of
production, paying workers fair wages etc.
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