Introduction to Business

QCF 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
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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.
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 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)
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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
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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
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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.
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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.
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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

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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.
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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.
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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)

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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.

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 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.

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