Business EnvironmentLO 1: CLASSIFICATION OF BUSINESS OWNERSHIP

SESSION 02: 13/10/2016

Classification of business

Three main ways:

By activity

By size

By legal structure

01. Business classification basedon the ACTIVITY

Based on the industry in which the business is operating there are 3 main

classifications.

Primary sector, Secondary sector and Tertiary sector

Primary sector: Industries or businesses which deal with natural resources. These

businesses engages in acquiring raw materials

Example: Metals and coals – mined, oil drilled from the ground, food –farmed, fish-

trawled

01. Business classification basedon the activity

Secondary sector: Secondary sector businesses are those that take the raw materialsproduced by the primary sector and process them into manufactured goods and products.

Example: Food processing, Oil refining, Textile conversion into clothes, Wood beingtransformed to furniture

Tertiary sector: Supply of services to consumers and businesses. Hence, selling ofservices and skills. Further, may include selling of goods and productions from primary andsecondary industries

Retails, Restaurants, Transportation, Education, Healthcare

The chain of production

The chain of production indicates the interdependence of different sectors.

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02. Business classification basedon the SIZE

Size of business can be measured in 5 ways:

Turnover : Measures the total value of sales over a given time.

Employees : Classifies business according to the number of workers.

Capital employed : Compares the amount of money invested within the business

Profit : Compares the profit levels of the firm.

Stock market value : Compares the value of companies whose shares are traded.

Examples

Classification based on turnover

Small : Turnover < £1.4 million

Medium : £1.4 million < Turnover < £5.75 million

Large : £5.7 million < Turnover

Classification based on employee numbers

Small : Less than 50 workers eChannelling PLC, Kinza

Medium : Between 50-250 workers BMS , STAX Inc.

Large : Over 250 workers HSBC, Millennium IT

Is size everything??

During year 2011, Vodafone had a market capitalization of £ 154,683.6 Millionwith a turnover of £ 7,873 Million.

Meanwhile, Tesco had a market capitalization of £ 17,771.2 Million with aturnover of £20,988 Million.

WHICH IS THE BIGGEST COMPANY?OR

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03. Business classification basedon the LEGAL STRUCTURE

There are two broad categories of privately owned business

organizations.

The distinction rests upon on the status of the organization in

the eyes of the law (the legal status).

What is a person or a legal entity?

In business a person (or a legal entity) may be a biological person or it can be a collection of people.

A legal party has certain rights:

To make contracts

To carry out business transactions

To own property

To employ people

To sue and be sued for breach of contract

3.1 Non incorporated organizations

These are businesses which do not possess a separate legal entity

from its owners.

The owner(s) bear full liability for any action of the business: they may

sue and be sued for business activity or inactivity (Owner = Business).

Unincorporated enterprises include Sole Proprietorships and

Partnerships.

3.1.1 Sole Proprietorship

A business that is owned by a single owner.

Owner of the sole proprietorship is declared as the sole trader/ proprietor.

There is a simple formal setting up procedure (Registration for VAT, Name registry and obtaining

licenses for certain industries). Yet, will be subject to a variety of legal requirements such as contract

law, consumer law and employee law.

Examples : small independent retailers, beauticians, farmers, window cleaners, electricians etc.

3.1.1 Sole Proprietorship

Advantages Minimum initial capital requirement

All earnings/profits belonged by the owner

Swift decision making

Autonomy in decision making

No formal documentation required except the

tax returns

Confidentiality of information

Disadvantages All tasks of the business must be performed by

the owner him/herself

Skills and abilities are concentrated to the

owner

High labour intensity

Poor economies of scale

Unlimited liability

3.1.2 Partnerships

The relation which exists between persons carrying on a business in common with a view to profit.

A partnership comes into being when two or more people establish a business which they own, finance and runjointly for personal gain.

This form of business does not have its own distinct legal personality.

Hence, partners have unlimited liability.

Partnerships involve minimum 2 -20 partners.

Partnerships which are more than 20 members are required to establish as a registered company if they do notcomply with the Companies Act rules for exceptions.

Examples : Accountants, consultants, lawyers

Partnership agreements

Partnerships are established by all partners signing a legally binding partnership

agreement.

A legally binding agreement aims to;

Ensure that the profits arising from conducting a business under a partnership agreement is

equally divisible unless otherwise stated.

Ensure that in the event of a loss, it is equally divided amongst all the partners.

3.1.2 Partnership

Advantages More capital can be raised

No need to submit accounts

Partners are entitled to distribute the profitsamong themselves

Likely to be a breadth of skills and abilities

Divide up tasks between individuals

Losses can be shared equally

Disadvantages Unlimited liability

Legal partnership agreement – nominal fee

Decision making should be conducted uponconsultation

Independence is lost

If a partner leaves the partnership isdissolved

Task : Written Individual Work

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3.2 Incorporated business organizations

A business that is legally declared as a corporate entity which is separate from its owners.

An incorporate business means that the business owners are not held personally liable for the businessobligations.

Two forms : Public limited companies & Private limited companies

English law recognises three ways in which new corporates can be originated:

Royal Charter

Statue

Registration : Memorandum of Association, Memorandum of Articles Certificate of Incorporation

(p.65) (p.66)

3.2.1 Public Limited Companies (PLC)

PLC’s are the biggest form of private businesses

Shares are sold at the stock exchange.

Shareholders have a limited liability (p.57)

Shareholders vote for the board of directors whom will run the business

The company must have the words/letters ‘Public Limited Companies or PLC’ in its name.

Accounts must be disclosed to the public

PLC’s in Sri Lanka

3.2.1 Public Listed Companies

Advantages Access to more capital

Higher bargaining power

Limited liability

Death/illness of an owner does not influence

the company continuity

Disadvantages Firms can be taken over : LOLC purchased

Browns

Accounts are not private

Expensive to set up

Have to share profits by means of dividends

Lack of independence in decision making

3.2.2 Private Limited Companies

Company owned by a single shareholder or more

Shares are not traded publicly : shares are traded through business contacts

Limited liability

Shareholders vote for the board of directors

Business name should consist the world/ letters ‘Limited or LTD’ in its name

LTD companies in Sri Lanka

3.2.2 Private Limited Companies

Advantages Access to capital through selling shares

Limited liability

Death/illness does not impact the

continuity

Accounts are private

Disadvantages Shares cannot be sold in the stock

exchange

Expensive to setup

Profits are shared by means of dividends

Decision making is not independent

Sole Proprietor to Public LimitedCompany

Individual settinga small business

as a soleproprietorship

People whowant to co-own

start apartnership

When they wantto limit liability,

they establish aprivately owned

corporation

If the corporationgrows

sustainably overtime, it can beconverted to apublicly heldcorporation

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Other forms of businessorganizations

These are considered as developments of the legal structure:

Licensing

Franchising

Joint ventures

Case illustration : BIG MAC GETSBIGGER

01. Franchising

This is an arrangement where one party (the franchisor) sells the right to another party (thefranchisee) to market its products or service.

In terms of the legal status the parties involved could be possessing any of the legal statusdiscussed.

However, practically, franchisor is a company whilst the franchisee is a sole trader or apartnership.

Both parties, franchisor and franchisee, have a separate legal entity.

Nature of the contract between both the parties make them interdependent

01. Forms of Franchising

Business format franchise or trade name franchise Franchisor agrees to allow the franchisee to sell the product or service with the help of a franchise package which contains

all the elements needed to set up and run a business at a profit. These include the brand name, any associated supplies, promotional materials and other forms of support and assistance.

In return franchisee pays an initial sum or fee for the use of service and remits royalties based on sales and profits and

agrees to make contribution for consultancy, training and promotion to maintain standards.

McDonalds vs Abans, KFC vs. Cargills, Burger King vs. Softlogic

Manufacturer/ retailer franchise : Car dealers

Manufacturer/ wholesaler franchise : Coca Cola, Pepsi

Wholesaler/retailer franchise : Spar and Mace

01. Franchising advantages anddisadvantages

Advantages Vehicle for companies seeking rapid

overseas expansion

Entrepreneurs perceive as a secureoption to start up a business

Research supports the survival ofbusiness

Disadvantages Franchisor risks the company reputation

Franchisee has a financial risk

02. Licensing

Licensing is another form of non-equity agreement under which a firm in one

country (the licensor) authorizes a firm in another country (the licensee) to use

its intellectual property (e.g. patents, copyrights, tradenames) in returns for

certain considerations such as royalty payments

Licenses may be granted to individuals, independent companies, subsidiaries of

a multinational etc.

02. Licensing advantages

Advantages Reducing competition by sharing

knowledge Seeking overseas profits without direct

investments Avoiding restrictions on foreign investment

or imports imposed by other countries Recouping some research and

development costs Gaining a share of an overseas market

Disadvantages Owner loss a degree of control over the

asset including the quality of production

Quality may impact the brand name andsales elsewhere

Domination of the licensee may excludethe licensor from the market placeresulting competition where licenseedevelop a compatible product

03. Joint Venture

This is a contractual agreement involving two parties

Or

Jointly owned and independently incorporated business organization

involving more than one organization

Thank You!