Chapter – 2 Business Structure

Changes in business sector impotency

1. Industrialization –
Growing importance of the secondary sector /manufacturing industries in developing countries.

Advantages Disadvantages
Total national output (GDP) increases and The chance of work in manufacturing can
this raises standards of living encourage a huge movement of people from
the countryside to the towns, which leads to
housing and social problems
Increasing output of goods can result in
lower imports and higher exports of such
products
Imports of raw materials and components
Value is added to the countries’ output of are often much needed, which can increase
raw materials, rather than just exporting the country’s import costs
these as basic, unprocessed products
Much of the growth of manufacturing
Expanding and profitable firms will pay industry is due to the expansion of
more tax to the government multinational companies

Expanding manufacturing businesses will

result in more jobs being created

2. Deindustrialization
● Decline in the importance of secondary-sector activity and an increase in the tertiary sector in developed
country.

Reasons for deindustrialization

● Willingness of people to spend more money on tertiary sector in developed countries . Ex- Hotel
● It is difficult for developed countries to compete with newly industrialized countries in manufacturing
goods, ex - china
 Public and private sectors
● Public Sector – comprises of organization accountable to and controlled by central or local government
● Private Sector – comprises of businesses owned and controlled by individuals or groups of individuals

Impotency of the public sector

● To provide important services – ex – Police, Health

● To provide public goods – ex roads, street lights

Types of Economies

● 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.

Private sector Legal Structures

Sole Trader
A business financed, owned & controlled by one person
Advantages Disadvantages
Easy to set up – few legal formalities Long hours often necessary
Owner has complete control Difficult to raise additional capital
Owner keeps all profits Can face intense competition from bigger firms
Can use owners interests and skills, rather than Lack of continuity – there is no separate
working as an employee for a larger firm
Able to choose times and patterns of working legal status so when the owner dies, the business
will end too
 Able to establish close relationships with staff and
customers
Unlimited Liability – Owners of the business are responsible for the debts of the business, meaning their
personal assets are at risk.
Partnerships

● A business formed by two or more people to carry on a business together, with shared capital investment
and, shared responsibility.
● Partners are bound by the terms of the Partnership Act 1890.

Advantages Disadvantages
Partners may specialize in different areas of Lack of continuity – the partnership will have to
business management be reformed in the event of a death of a partner
Shared decision making Unlimited Liability for all partners
Can raise more capital Profits are shared
Greater privacy than corporate organizations Not possible to raise capital from selling shares
Easy to set up as less legal formalities than
limited companies All partners are bound by the decisions made by
any one of them
Can shared losses Less independence of decision making compared to sole trader

Limited access to capital when compared to Limited companies

Potential for conflict between partners

Limited Companies
● Incorporated business with limited liability, a separate legal personality and continuity of a
business.
● In setting up, these must register with the Registrar of Companies at Companies House.

Main features of a limited liability company

1. Limited Liability - If the company fails shareholder is only liable to the amount invested in the
company, not the total wealth of the shareholders.
 2. Continuity – The partnership will have to be reformed in the event of a death of a partner
3. Legal personality - A company is recognized as a separate legal person with separate legal identity
from its owners.
Example- If the food sold by a company are found to be dangerous, the company itself can be taken to court –
not the owners.

Legal formalities/ Documents to be submitted in setting up a company

Memorandum of Association

Name of the company

Address of the head office

Maximum share capital for which the company seeks authorization(relative importance of one share)
Declared aims of the business. (Aims should be legal)

Articles of Association
● Document covers the internal workings and control of the business –
● Example, the names of directors and the procedures to be followed at meetings
Private limited companies / (‘Limited’ or ‘Ltd’)

● Incorporated business that is owned by shareholders but does not have the legal right to sell shares
to the public
● Shares can be issued to the family, friends and employees only.
● Share – Certificate confirming part ownership of a company and entitling the shareholder owner to
dividends and certain shareholder rights
● Shareholder – Person or institution owning shares in a limited company

Advantages Disadvantages
Shareholders have limited liability Many Legal formalities involved in establishing
Separate legal personality business
Continuity in the event of a shareholder’s death Quite difficult for shareholders to sell shares
Able to raise capital from sale of shares to Capital cannot be raised by sale of shares to the
 family, friends and employees general public
Original owner is still often able to retain control End of year accounts must be sent to Companies
Greater status than an unincorporated business House – available for public inspection there

Public Limited Companies / plc’ or ‘inc.’

● Incorporated business that has the legal right to offer shares for sale to the public.
● Shares of these companies are listed on the Stock Exchange

Advantages Disadvantages
Limited Liability Legal formalities in formation
Ease of buying and selling of shares for Cost of business consultants and financial
shareholders encourages investment advisers when creating such a company
Risk of takeover due to the availability of
Separate legal identity shares
Need to disclosure of information to
Can raise more capital due to the shareholders & accounts to public
By selling shares to the public Business cannot control the share prices
Directors influenced by short-term objectives
Continuity of major investors (Short-termism)
Divorce between ownership & control
(ex - shareholders might want short term
profits, while directors decide to aim for long-
term growth of the business, in order to
increase their power and status.
Cooperatives
● Business organisations owned and controlled by a group of people to undertake an economic activity for
mutual benefit.
● Mostly common in agriculture and retailing.
● All members can contribute to the running of the business, sharing the workload, responsibilities and
decision-making, although in larger cooperatives some delegation to professional managers takes place.
● All members have one vote at important meetings.
● Profits are shared equally among members.

Types of co-operatives
● Consumer Cooperatives – members buy goods in bulk, sell them, and divide the profits between
members
● Worker Cooperatives – workers buy the business and run it; decisions and profits are shared by the
members.
● Producer Cooperatives – producers organise distribution and sale of products themselves
Advantages Disadvantages
Good motivation for all members to work hard Poor management skills unless professional
as they will benefit from shared profits managers are employed
Working together to solve problems and take Capital shortages because no sale of shares to
decisions the non-member general public is allowed
Members share responsibilities, decision
making Slow decision making if all members are to be
Bulk Buying with discounts consulted on important issues

Franchises
● A business that uses the name, logo and trading systems of an existing successful business;
● Ex - Mc.Donald, KFC
● Franchisee (A business that uses the name, logo ) should purchase the franchise licenser from the
franchiser(original owner of the brand).
Advantages Disadvantages
Fewer chances of failing new business Share of profits has to be paid to
franchiser each year
Advice and training offered by franchiser Initial franchise license fee can be expensive
National advertising paid by franchiser Local promotions may be paid by franchisee
Materials obtained from established suppliers No choice of supplies or suppliers to be used
Franchiser agrees not to open another branch Strict rules over pricing and layout of outlet reduce
in local area owner’s control over their own business

Joint Ventures
 Where two or more businesses agree to work closely together on a particular project and create a
separate business division to do so.

Advantages Disadvantages
The business failure of one of the partners
Costs and risks of a new business venture are would put the whole project at risk
shared
Can get the use the strengths and experiences Of
both companies
Can use joint ventures to enter in to new abroad Styles of management and culture might
markets by sharing knowledge. be so different

Holding Companies –
● A business organisation that owns and controls a number of separate businesses, but does not unite them
into one unified company.
● They often have separate businesses in different markets altogether.
● Ex - John Keels holdings - They operate supermarkets, constructions, hotels & varius businesses separately

Public Corporations/ Public sector enterprise/Nationalised industry –

Businesses enterprise owned and controlled by the state. They often do not have profit as a main objective.
Ex - Ceylon shipping corporation ltd
Advantages Disadvantages
Managed with social objectives rather than Tendency towards inefficiency due to lack of
solely with profit objectives strict profit target
Loss-making services might still be kept More political influence
operating if the social benefit is great enough
Finance raised mainly from the government Subsidies can encourage inefficiencies