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Busines Structure

ECONOMIC SECTORS

Business can be categorised in three broad categories or stages.

• Primary Sector- It is the first stage of production. All those businesses which are related with extraction of raw material from Earth such as mining, fishing, farming, and quarrying are known as primary sector businesses. Raw materials that are extracted are send to the secondary sector.
• Secondary Sector- They convert raw materials into finished or semi-finished goods. All businesses which manufacture and process the raw materials which can be used by the end consumers are known as secondary sector businesses. These include building, construction, compute assembly, shoes factories, textile factories etc.
• Tertiary Sector- All the businesses which provide services and assist both the primary and secondary sector businesses can be classified as tertiary sector businesses. These include transportation, insurance, hospitals, educational institutes, showrooms etc.

DIFFERENCES BETWEEN PRIVATE AND PUBLIC SECTOR

• Private Sector- This sector comprises businesses owned and controlled by individuals or groups of individuals. Such businesses are commonly found in the free market economy. Their main aim is to make profit through the sale of private goods. Examples of business found in the private sector include:
  • Sole trader
  • Partnership
  • Private Limited Companies
  • Public Limited Companies
  • Co-operatives

SOLE TRADER

• Refers to a business in which one person provides permanent finance and, in return, has full control of the business and is able to keep all of the profits. It is owned by one person. However, the owner may employ other people. Examples are hair salons, bus operators, grocery stores, etc.
  • Ownership: owned by one person
  • Legal status: The business is not a recognised as a legal entity. It is referred to as an unincorporated business
  • Liability: The owner of the business is subject to unlimited liability. If the business fails the owner may lose personal possessions (personal property)
  • Continuity: The business come to an end when the owner dies
• Advantages:
  • easy to form- less capital and legal requirements
  • owner has direct control of the business- makes decisions that best suit their conditions
  • all profits go to the owner
  • has personal contact with both customers and employees
• Disadvantages:
  • unlimited liability
  • difficult to raise capital
  • limited management expertise
  • difficulty in attracting qualified employees
  • lack of continuity when the owner dies

PARTNERSHIP

• Refers to a business owned by at least two but not more than twenty people. The partners agree to carry on business together, with shared capital investment and, usually, shared responsibilities.
  • Ownership: owned by at least two to a maximum of twenty partners
  • Legal status: The business is not a recognised as a legal entity. It is referred to as an unincorporated business. However, it is possible to now establish an incorporated partnership.
  • Liability: The partners suffer from unlimited liability. If the business fails the owner may lose personal possessions (personal property)
  • Continuity: The business come to an end when the key partner dies
• To enter into a partnership, partners can have a verbal agreement or otherwise write a Partnership Deed/Agreement which is a document setting out some of the following details:
  • amount of capital contributed by each member
  • salaries/wages to be paid to each member
  • rights and obligations of the partners
• Advantages:
  • more capital available
  • diversity of skills and expertise
  • quality decisions are made
  • personal contact with employees and clients
  • risk is spread over a number of people
• Disadvantages:
  • disagreements may easily create conflicts within the business
  • all partners responsible for the acts of each other
  • lack of continuity when the key partner dies or become insane
  • profit/loss sharing ratio not necessarily equal
  • the partnership often faces intense competition from large firms
  • the owner, by taking on a partner, will lose control of the business

LIMITED COMPANIES

• These are businesses where a number of owner(shareholder) gather in their resources to do a common business and to share the profits and losses proportionally.
• In a limited company, the debts of the company are separate from those of the shareholders. As a result, should the company experience financial distress because of normal business activity, the personal assets of shareholders will not be at risk of being seized by creditors.
• Ownership in the limited company can be easily transferred, and many of these companies have been passed down through generations.
• General features of limited companies:
  • separate legal entity
  • shareholders have limited liability
  • owners are called shareholders- they buy shares; it is a certificate confirming part ownership of a company and it entitles the shareholder the right to dividends
  • shareholders receive dividends as payments
  • the Board of Directors manages the affairs of the company
  • the company is governed by Memorandum and Articles of Association
  • shareholders hold Annual General Meetings (AGMs)

1. PRIVATE LIMITED COMPANIES
2. Refers to a small to medium-sized business that is owned by shareholders who are often member of the same family. This company cannot sell shares to the general public. They have two but not more than fifty shareholders. The right to transfer shares is limited. The business should submit financial statements and auditors reports to the Registrar of Companies.
   1. Formation: There are complex legal formalities. Two documents should be drafted by the founders of the company and these documents include the memorandum and articles of association
   2. Ownership: owned by at least two to a maximum of fifty shareholder
   3. Management and Control: it managed and control by the board of directors
   4. Legal status: The business is recognised at law as a legal person. It is referred to as an incorporated business
   5. Liability: The shareholders enjoy limited liability. If the business fails the shareholders’ personal assets cannot be taken. They only lose the capital they have invested in the business.
   6. Continuity: There is continuity
3. Advantages:
   1. shareholders have limited liabilities
   2. more capital can be raised
   3. greater status than an unincorporated business
   4. easy to transform into public limited companies
   5. do not have to publish annual accounts in the press
4. Disadvantages:
   1. not easy to form (up to six months)
   2. has to fill complex tax forms
   3. cannot raise capital through the stock exchange
   4. quite difficult for the shareholders to sell shares

• PUBLIC LIMITED COMPANIES
• These are large businesses, with the right to sell shares to the general public. The share prices are quoted on the national stock exchange.
• They have at least two shareholders to no maximum limit. Shares are freely transferable.
• The public can be invited to subscribe to shares and debentures through a prospectus.
• Can only start business after complying with all the requirements of the Companies Act. Annual accounting reports (financial statements) are supposed to be published in the press. Must keep a register of investors and directors’ shareholding.
  • Formation: There are more complex legal formalities. Three documents should be drafted by the founders of the company and these documents include the memorandum of association, articles of association and the prospectus
  • Ownership: owned by at least two to no maximum limit of shareholder
  • Management and Control: it managed and control by the board of directors
  • Legal status: The business is recognised at law as a legal person. It is referred to as an incorporated business
  • Liability: The shareholders enjoy limited liability. If the business fails the shareholders’ personal assets cannot be taken. They only lose the capital they have invested in the business.
  • Continuity: There is continuity
• Advantages
  • easy to raise capital through floating shares on national stock exchange
  • can operate on a large scale
  • managers and directors have room to work independently therefore prove their expertise in their areas of specialization
  • shareholders enjoy limited liability
• Disadvantages
  • difficult to form
  • less privacy- files always open for inspection by members of the public
  • decisions take time to make due to large size of the company
  • no personal connection between employees and customers
  • conflict of interest- shareholders are usually interested in expanding the business in order to raise the value of their shares

FRANCHISES

• Refers to an agreement where one business (the franchisor) grants another business/sole trader (the franchisee) the right to use its trademark or trade name as well as certain business systems. The franchisee sells the franchisor’s product or services, trades under the franchisor’s trademark or trade name, and benefits from the franchisor’s help and support.
• In return, the franchisee usually pays an initial fee to the franchisor and then a percentage of the sales revenue. The franchisee owns the outlet they run. But the franchisor keeps control over how products are marketed and sold and how their business idea is used.
• Well-known businesses that offer franchises of this kind include: Pizza Hut, McDonalds, Nandos, etc
• Contractual Obligation:
  • A franchise agreement should be drafted and signed by both parties. This is a legal contract in which the
  • franchisor gives the franchisee the right to use the business’s trademark.
  • The franchisor is not allowed to open a similar business nearby
  • It must specify the franchise fee as well as monthly royalty payment
  • The agreement lays out details of what duties each party needs to perform
  • It also states the duration of the franchise contract
• Advantages to the franchisee:
  • Franchisee benefit from pre-opening support e.g site selection, design, financing
  • Franchisor assists in training staff
  • Franchisor advertise goods on behalf of the franchisee (saves money)
  • Franchisee enters into an existing market which increases the chances of business success.
  • Risk is reduced and is shared by the franchisor.
  • Relationships with suppliers have already been established.
• Disadvantages to the franchisee:
  • The franchisor might go out of business or change the way they do things.
  • The franchise agreement usually includes restrictions on how you run the business. You might not be able to make changes to suit your local market.
  • The franchisee must pay initial fee and continuing fees to continue to use the trademark.
  • The franchisee cannot sell goods from other suppliers
  • Breach of contract can result in a penalty charge
• Advantages to the franchisor:
  • It’s a source of income to the franchisor (royalties received)
  • Risk of the business is spread among different franchisees
  • A network of outlets gives the business a far better chance of success
• Disadvantages to the franchisor:
  • Other franchisees could give the brand a bad reputation.
  • Franchisor must provide the franchisee with on-going support which then requires constant research
  • Setting up a franchise requires a lot of money

PUBLIC SECTOR

• Refers to all the businesses that are owned by the government on behalf of the public. They can be district councils or public corporations. They are established by an Act of Parliament.
• Advantages:
  • They provide important goods and services at reasonable prices
  • Provide employment to the majority
  • Implement government policies e.g charge low prices to reduce inflation
  • They are a source of income to the government
• Disadvantages:
  • They are inefficient and very wasteful due to the lack of profit motive
  • They tend to provide poor quality goods and services due to the absence of stiff competition
  • Lack of motivation among workers leads to inefficiency
  • They suffer from excessing political interference

COMPARING THE PUBLIC SECTOR AND THE PRIVATE SECTOR

• Usually, the aim of public sector business is to provide services to the community.
  • For example, if the transport system is owned by the government and it is running a bus service to an interior village and it is not getting enough customers, the government might still continue it as its main objective is to provide service and not to maximise profits.
  • Whereas private sectors businesses give priority to profits and may end the service if it does not find it profitable to run the service.
• The public sector strives to create employment whereas the private sector’s main aim is to become efficient and cut costs and in this process, they might cut jobs. Public sector business usually locates in regions where there is underdevelopment so as to create jobs and income for the local population. Private sectors might not keep these things in consideration and will look for external economies of scale.