EQ: What are the diff erent types of business structures and the diff erent ways of c lassify ing business act iv ity.

CH. 2BUSINESS

STRUCTURE

• Extract natural recourse to be used and processed by other firms

• EX: Farms, oil drilling, fishing…

Primary sector business activity

• Manufacture and process products from natural resources

• EX: Computers, baking, clothing…

Secondary sector business

activity• Provide services to consumers &

other businesses• EX: Retail, transportation,

banking…

Tertiary sector business activity

CLASSIFICATIONS OF BUSINESS ACTIVITY

Balance of the diff erent sectors depends on a country’s level of industrialization.

CLASSIFICATIONS OF BUSINESS ACTIVITY

Employment data 2008as % of total employment

Country Primary Secondary Tertiary

United Kingdom 2 20 78

China 44 24 32

Ghana 54 20 26

How would you explain the high level of Primary sector business activity in Ghana?

In DEVELOPING countries….(Africa & Asia)

CHANGES IN BUSINESS ACTIVITY

Benefits of Industrialization Problems of Industrialization

• Increases national output (GDP)• Increases standard of living • Increases exports• Lowers imports• Increases jobs• More taxes generated for

government• Increased production adds value

to exports

• Mass movement of pop. to towns (Housing & Social problems)

• Imports of raw material needed for production (increases import costs)

• Growth of multinational companies

In DEVELOPED countries….(USA & UK)

CHANGES IN BUSINESS ACTIVITY

Benefits of Deindustrialization Problems of Deindustrialization

• Rising incomes mean people spend more on services rather than goods

• Growth in tourism, hotels, and restaurant services, financial services

• Spending on physical goods rises slowly

• Manufacturing businesses in developed countries face more competition from developing countries

• Rising imports of goods is taking away from the domestic secondary-sector firms

Public Sector

Government owns the business

Important services (education, police, public transportation)

“Public Goods” Street lights

Private Sector

Individuals own the business

Types & sizes vary greatly

PUBLIC AND PRIVATE SECTORS

•Economic resources are owned and controlled by both private and public sectors

Mixed Economy

•Economic resources owned largely by the private sector with very little state intervention

Free- market

Economy

•Economic resources owned, planned and controlled by the state

Command economy

TYPES OF ECONOMIES

Local businesses• Operate in a small & well-defined part of the country• No attempt to expand to across the whole country• Small construction businesses, Hair Salons, Family

BusinessesNational Businesses• Branches & operations across the country• No attempt to expand to other countries• Large car dealerships, Retail shops, National banking firms

International businesses• Operate in more than one country• Multinational businesses

LOCAL, NATIONAL, INTERNATIONAL BUSINESSES

Private-sector

businesses

Sole trader Partnerships

Cooperatives

Limited Companies

Private Public

LEGAL STRUCTURE OF BUSINESS(PRIVATE SECTOR)

Most common formLikely very smallUnlimited liability

People can sue the owner for business & personal assetsHard to raise money & additional capital

SOLE TRADER(ONE OWNER)

Advantages Disadvantages

• Easy to set up – no legal • Owner has complete control• Owner keeps all profits• Choose working conditions• Establish close relationships with

staff & customers• Based on interests and skills of

the owner

• Unlimited liability• Competition from bigger

businesses• Owner responsible for all aspects

of management• Difficult to raise capital• Long hours• No continuity – owner dies,

business dies

Not a separate legal unit like a corporationGroup of individualsUnlimited liability

People can sue each partner for business & personal assetsPartnership agreements – management roles, splitting

$$$...

PARTNERSHIP (MORE THAN ONE OWNER)

Advantages Disadvantages

• Partners work in diff. areas of management

• Shared decision making• Additional capital from partners• Business losses shared btw

partners• Greater privacy• Fewer legal formalities than

corporations

• Unlimited liability for all partners• Profits are shared• No continuity – a partner dies,

business needs to be reorganized

• Bound by partner decisions• Can’t sell shares to raise capital• A sole trader, taking on partners,

will lose independence of decision making

Limited liability If business fails, the shareholders personal assets are

protectedLegal personality

Has a legal identity separate from ownersContinuity

The death of an owner or director does not impact the business

LIMITED COMPANIES(INCORPORATED/CORPORATIONS)

Limited Companies

Private Limited

Company

Public Limited

Company

An incorporated privately owned businessSmall businessesShares usually sold to family, friends, and employeesA corporation not listed on the stock exchange

PRIVATE LIMITED COMPANY (LTD)(SHARES SOLD PRIVATELY)

Advantages Disadvantages

• Shareholders have limited liability

• Separate legal personality• Continuity – Business lives

forever• Original owner may retain

control• Raises capital by selling shares

to family, friends, & employees• Greater status than an

unincorporated business

• A lot of legal work in forming the corporation

• Can’t raise capital by selling shares to the general public

• Difficult for shareholders to sell shares

• Less secrecy over financial affairs than sole trader or partnership

Sale shares (ownership pieces) on stock exchangeMost common form for large businessesCan raise VERY LARGE amounts of capital ($$$) for

expansionSeparation between ownership & control

Large amounts of shareholders, Who runs the company? Shareholders appoint a board of directors to run the

business Many Public Limited Companies convert back to Private

status to keep control in the hands of the original owner.Plc., Inc.

PUBLIC LIMITED COMPANY (PLC)(SHARES SOLD ON STOCK EXCHANGE)

EXAMPLES OF PUBLIC LIMITED COMPANY

Advantages Disadvantages

• Limited liability• Separate legal identity• Continuity• Ease of buying and selling of

shares for shareholders – encourages investment

• Large capital sources from publically selling shares

• Legal formalities in formation• Cost of business consultants

and financial advisers when creating the company

• Share prices subject to change – sometimes for reasons beyond the company’s control

• Legal requirements to share financial info with shareholders & public

• Risk of takeover due to the availability of the shares on the stock exchange

PUBLIC LIMITED COMPANY (PLC)(SHARES SOLD ON STOCK EXCHANGE)

All governments require legal steps to starting a company.

In the UK…1. Memorandum of Association

a. Name of Companyb. Address of head offi cec. Maximum share capitald. Aims of business

2. Articles of Associationa. Explains internal workings (business procedures)b. Control of the business (names of directors)

LEGAL FORMALITIES IN SETTING UP A COMPANY

Cooperative All members contribute to the running of the business All members have one vote Profits shared equally among member

Franchises Allows an owner to use the logo, marketing, product, &

style of the parent company (McDonalds, Subway, Monkey Joe’s)

Joint ventures Two or more businesses agree to work closely together on a

particular project and create a separate business division to do so

Holding companies A business that owns and controls a number of separate

businesses, but DOES NOT unite them into on unified company

OTHER FORMS OF BUSINESS ORGANIZATION

Today, 54 grower-members make up the Cooperative. Since its inception, each member, no matter how large or small his farm, is treated equally with each member having one vote. Equal voice in Cooperative business has helped to sustain progress and keep alive the pioneering spirit that originally brought the Cooperative into being. The Board of Directors is responsible for determining policy and providing direction for the management team. Day-to-day business operations are handled by the professionals that make up the Cooperative staff.

EXAMPLE OF A COOPERATIVE

We us “Public” in two ways!Public corporations ≠ Public limited

companies Public corporations are owned by

governmentPublic corporations are in the Public SectorProfit is not a major objectiveCheck Pros & Cons on p. 28

PUBLIC-SECTOR ENTERPRISESPUBLIC CORPORATIONS

Public limited companies (Plcs) are in the private sector of industry – but public

corporations are not!!!

Citizens is a not-for-profi t, tax-exempt government corporation whose public purpose is to provide insurance protection to Florida property owners throughout the state. The corporation insures hundreds of thousands of homes, businesses and condominiums whose owners otherwise might not be able to find coverage. 

EXAMPLE OF PUBLIC CORPORATION