Introduction to BusinessQCF Level 4 Unit

Learning Outcome #2 Business Structures

A. The Economy

An economy can be described as the wealth and resources of a country or region, especially in terms of production and consumption of goods and services.

Types of Economies

There are two basic economic systems as follows:

A market economy (capitalist economy), is an economic system where economic decisions and the pricing of goods and services are determined by the interactions of supply and demand and there is little government intervention or central planning. It works on the assumption that the market forces of supply and demand are the best determinants of what is right for a nations well-being. A planned economy (command economy), is an economic system where economic decisions are made by the state or government rather than by the interactions of consumers and businesses and it seeks to control what is produced and how resources are distributed and used. It works on the assumption that the market does not work in the best interest of the people and in order for social and national objectives to be met a central authority needs to make decisions.

In reality all economies are a mixture of both a market and planned economy this is called a mixed economy. A market economy combines both public and private enterprise and it allows for a certain level of private economic freedom in the use of capital and also allows government intervention in economic activities so that social aims can be met.

Sectors of the Economy

An economy can be divided into three distinct sectors based on the types of goods and services produced:

Primary sector In this sector, raw materials are produced, grown or extracted from the earth. Examples of primary sector activities include mining, agriculture and oil production. (extraction, agriculture and creation of raw material) Secondary sector This is essentially the manufacturing sector where raw materials are processed and assembled into products for consumption. This includes engineering and construction as well as energy production. (conversion, processing and transformation) Tertiary sector This is sometimes referred to as the service sector and hence includes all businesses that provide a service. (banking, consultancy and education)

The Private and Public Sectors

Private sector The private sector can be defined as the part of the national economy that is not under direct control of the government and is run by individuals and companies for a profit. In the private sector capital is held by the individuals on their own behalf. Private companies seek to make a profit by carrying out activities permitted by the Memoranda and managers are responsible to their shareholders. Example, Cold Stone Creamery. Public sector The public can be defined as the part of the economy that is controlled by the government and is concerned with the provision of various government services. In the public sector capital is held by the treasury on behalf of the citizens. Public sector organizations carry out tasks assigned to them by Parliament and is responsible to it which is represented by the relevant minister of the government. Example, National Gas Company of Trinidad and Tobago.

Types of Goods:

Public goods These are goods which cannot be provided to one individual who pays without non-payers sharing them. They are non-rivalrous and non-excludable in nature. Examples include street lighting and national security. Private goods These are products that must be purchased in order to be consumed, and whose consumptions by one person prevents another individual from consuming it. They are rivalrous and excludable in nature. Examples include food and clothing. Merit goods Goods or services that are provided free by a government for the benefit of the entire society, as they would under provided if left to the market forces or private enterprise. Examples include health care and education. Demerit goods A good that is considered damaging or unhealthy in some way such as physically (cigarettes), mentally (gambling) or morally (prostitution). These are usually subjected to additional taxes in order to reduce its consumption.

B. Basic Forms of Business Organizations

Non-Corporate Organizations (Private Sector)

Non-corporate organizations are those that do not have a separate legal identity from its owners. This means that the owners are fully liable for the actions of the organization, including any debts.

1. Sole proprietors, still often known as sole traders though they are found in activities other than trade.2. Partnerships.

Corporate Organizations (Private Sector)

Corporate organizations are those that have a separate legal identity of their own.

1. Public limited companies, which can be usually recognized as their official title normally ends with abbreviation plc.2. Private limited companies, can be usually recognized as their official title normally ends with the word limited or the abbreviation Ltd.

Limited and Unlimited Liability

Limited liability exists where the owners of a business have their individual responsibility for its debts limited in some way should it fail. Partners (usually) and sole traders have unlimited liability and may lose everything they own if their business fails.

C. The Sole Trader

A sole trader/sole proprietor is a type of business entity that is owned and run by one individual and where there is no legal distinction between the owner and the business. Since the business is not a separate legal entity from the owner he/she is faced with unlimited liability and all contracts made with the business are made with the individual proprietor. Examples include hairdressers and seamstresses.

Advantages

1. The business can be easily established with minimum of formalities as there are few legal procedures and bookkeeping and accounts are straightforward. 2. The owner has independence and control as there is no need to consult others when making decisions.3. Decisions can be made quickly and this allows the business to respond flexibly to both market changes and consumers demands. 4. All profits made belong to the proprietor.

Disadvantages

1. Finance is usually limited to any money the proprietor can provide or borrow and this limits the scale of the business.2. A sole proprietor has unlimited liability and stands to loose everything if the business gets into trouble including the family house if it has been put up as security for loans. 3. The lack if finance may prevent the business from reaching a viable size and expansion is limited to the profits being ploughed back into the business. 4. Any one persons range of expertise is limited and hence the sole proprietor may rely on others for certain aspects of the business.

D. Partnerships

A partnership can be defined as the coming together of two or more persons to carry on a business in order to pursue common business goals (profit). Some of the disadvantages of a sole trader can be overcome by forming a partnership. This increases the availability of financial resources as well increases the range of expertise available to the firm. It does not require any written formal agreement; a verbal agreement is sufficient. Examples include Twitter, Microsoft and Google.

The key features of a partnership are:

All partners have unlimited liability for the debts of the firm and so a partner may loose his/her personal wealth if the business fails. Any partner can bind the partnership to a contract with third parties. All partners are jointly liable for meeting the obligations of contacts on behalf of the partnership. A partnership is not a separate legal identity so it is the partners who are personally liable. All partners share profits according to agreed arrangements. The names of each partner and the business address(es) must be clearly shown on all business documents and the full names of partners must be displayed at the place of business.

Advantages

1. A partnership is small enough to be quite flexible and the partners are close enough to the basic level of the business to know what is going on.2. The legal and financial procedures are relatively simple and there is no obligation to publish accounts.3. There is no need for the partnership to be bureaucratic or for the systems and controls of the business to be too complex. 4. Unlike a sole trader it is easier for a partnership to raise extra resources in order to expand or develop. Disadvantages

1. All partners have unlimited liability for the debts of the firm and so a partner may loose his/her personal wealth if the business fails. 2. The withdrawal or death of a partner may dissolve the firm. 3. The decision making process may be difficult or slow as each partner must agree, one difficult partner can create problems.4. Any partner can enter an agreement which binds the others.

Limited Partnerships

Limited partnerships are those where a partner wishes to only be liable for the amount of money he/she invests into the business and not be involved in the running of the business.

Limited Liability Partnerships

A limited liability partnership is a partnership in which the partners have limited liability. It has elements of both partnerships and corporations.

E. Companies

Private and Public Companies

Both private and public limited companies are owned by their ordinary shareholders, who hold the equity in the company.

The main differences between private limited companies and public limited companies are:

Shares in private limited companies can only be traded with the agreement of the shareholders and they cannot be offered to the general public. Shares in public limited companies can be offered to the general public and are often, though not always, freely traded on stock exchanges. A private company must have at least two shareholders while a public company must have at least seven. A private company must have at least one director (two if the company secretary is a director) and a public company must have at least two directors.

In general private companies are smaller businesses with much less capital than public companies.

Advantages

1. The company has an existence and identity separate from the people who set it up and who work in it and therefore enjoys the legal status of incorporation. 2. The continuation or legal standing of a company is not affected by the death of a member or the withdrawal of a director and hence there is continuity of succession.3. Those who invest in limited companies have limited liability and may be more ready to take a limited risk.4. Large amounts of capital can be raised from large numbers of investors, especially for new and risky ventures.

Disadvantages

1. The procedures for starting up a company are costly and complicated compared to other forms of businesses. 2. Detailed annual accounts have to be prepared, audited and submitted to the Registrar, an Annual Report made to shareholders and a register of shareholdings has to be maintained. The publication of such information may assist competitors.3. Shareholders have little control in practice, as individual shareholdings tend to be small and most of them are held by investment institutions and unit trust, who rarely take an interest in managing the firms in which they hold shares.

Franchise

A type of business organization in which a firm which already has a successful product or service (franchisor) enters a continuing contractual relationship with another business (franchisee) operating under the franchisors trade name and usually with the franchisors guidance, in exchange for a fee. Examples include McDonalds and Subway.

The franchisor owns the overall rights and trademarks of the company and usually charges the franchisee an upfront fee to do business under the franchisors name. The franchisor aso usually collects an ongoing franchise royalty fee from the franchisee.

The franchisee is an individual who purchases the rights to use a companys trademarked name and business model to do business.

Advantages of a Franchisor

1. Franchising creates another source of income for the franchisor through several financial benefits such as the payment of royalties by the franchisee.2. The franchisor can have a smaller central organization when compare to developing and owning locations themselves. It also means uniformity of procedures resulting in increased productivity and consistency.3. To the franchisor franchising means the spreading of risks by increasing the number of locations through other peoples investments resulting in faster expansion and and increased opportunity to focus on changing market needs. 4. With a smaller central organization, the business maintains a more cost effective labour force and more effective recruitment.

Disadvantages of a Franchisor

1. Considerable amounts of capital is required to build the franchise infrastructure and pilot operation. In the beginning the franchisor is also required to have the appropriate resources to recruit, train and support franchisees. 2. At the beginning of the franchise there is a broader risk of misfit spoiling the trade name until the franchisor can select the right candidate for the business.3. There is a risk that franchisees can exercise undue pressure over the franchisor in order to implement new policies and procedures.4. The franchisor has to disclose confidential information to the franchisees and this may pose as a risk to the business.

Advantages of a Franchisee

1. The unnecessary trial and error period of starting and operating a new business is avoided. 2. There is lower financial risk because investment costs are lower and the profit margins are higher to other ventures. 3. There is the benefit of operating under a recognized trade name/trademark, which can have better marketing results.4. The franchisee has access to accumulated business experience and technical know-how in managing the business.

Disadvantages of a Franchisee

1. The franchise fees and royalty payments that are required to be paid to the franchisor can sometimes be quite exaggerated. 2. Upon expiration of the franchise contract all the goodwill built in the local market is transferred to the franchisor.3. It is necessary for the franchisee to abide by all the franchisors operating systems, standards, policies and procedures.4. Reduced corporate profit margins due to payment of royalties and levies.

F. Public Sector Organizations

The public sector is owned and directed by the government on behalf of the people. Privatization is the transfer of ownership, property or business from the government to the private sector.

Nationalized Industries

Nationalized industries also known as public corporations are public companies set up by an Act of Parliament. They are state owned and are formed to deliver essential goods and services at affordable prices to the general public.

Local Authorities (Municipal Bodies)

Local authorities are responsible for providing a wide range of public services to their geographic area such as education and waste disposal. The services provided may not necessarily be essential but the main aim is to provide them more efficiently and at a cheaper cost than the private enterprise.

Quangos (Quasi-Autonomous Non-Governmental Organizations)

All quangos have powers delegated to them by a minister who appoints the members of the board and provides for finance. Some quangos are self-financing while others get their income from the government. The aim of setting up quangos is to take advantage of market efficiencies while retaining a measure of government control.

The Public Enterprise and State Ownership Debate

Pros:

Some goods and services are natural monopolies, that is, they can only be supplied by one supplier example water supplied to households. Public ownership suppose to prevent the exploitation of the consumer by the monopoly. Some activities are not profit making but are essential for the community so they tend to be performed by central or local government example street lighting. Some enterprises require large amounts of capital with no return for several years as a result only the state can provide the resources example nuclear power stations. It is generally felt that some activities should be free from political bias and control which can result from being in private hands. Some activities are of vital strategic importance and should not be at the risk of falling into foreign hands example military aircraft.

Cons:

Losses are carried by taxpayers which may result in inefficiency and waste. They interfere with the free market forces.