BUSINESS AND ITS

ENVIRONMENT
Economic Activity and Legal Structures
 
Objectives:

 At the end of this chapter students should be able to:

 • Identify the different types of business activity
 • Distinguish among the different types of business activity
 • Distinguish between the private and public sectors
 • Describe the different private- and public-sector businesses
 • Outline how each of the businesses is formed
 • Discuss the benefits and drawbacks of each type of business
 • Identify examples of each type of business
  
Types of economic activity

The Caribbean business environment can be divided into three types of economic
or business activity. These are:
 Primary Sector
 Secondary Sector
 Tertiary Sector
Primary Sector

The primary sector incorporates all the extractive industries, including mining
(for example, bauxite), fishing, forestry and farming. In most cases, the products
of the primary sector are the raw materials that are used for secondary
production. For example, bauxite is used for manufacturing aluminium and
lumber is used in the building of furniture and houses. The primary sector also
includes the fishing and agricultural industries.
Some Caribbean countries are heavily dependent on the primary level of activity
in order to earn foreign exchange. Currently, some countries export large
amounts of our raw materials in their natural state instead of exploring the
products that could be produced by using those same resources. This means that
the secondary level of activity is perhaps not explored as much as it could be.
Dependence on the primary sector presents the country with the a lot of
advantages and disadvantages.
Advanatges of the Primary Sector

 The country is able to supply raw materials to firms for conversion

 The country can gain a comparative advantage over others in producing
certain goods
 Creation of jobs
 Generation of export revenues.
Disadvantages of Primary Sector

 Depletion of natural resources, especially because of exploitation

 Potential to earn more revenue if raw materials were to be converted into
finished products
 A decrease in the demand for finished products will decrease the demand for
primary products and so reduce revenue.
The Secondary Sector

The secondary sector involves the changing of raw materials into finished goods. It
incorporates the manufacturing and construction industries. Examples of secondary
business activities include the manufacture of chemicals and of baked products, and
the construction of houses, roadways and bridges. The Caribbean has a number of
businesses that take the raw materials produced in the region and convert them to
finished products — for example, Trinidad Cement Ltd and Grace Kennedy Jamaica.
While the trading of primary products is important, secondary sector products are
usually in higher demand. A dynamic manufacturing firm can take one primary
product and create a number of secondary products which will generate greater
revenues for itself. For example, a firm could use bananas to make banana chips,
banana milk shakes, banana bread, banana-flavoured soft drinks, banana porridge mix
and banana fritters. The struggle for some Caribbean countries is that they are not
able to make the best use of their primary products by converting them into
secondary products
Advantages of involvement in the secondary
sector

 Reduction in the importation of goods that are produced using the same raw
materials from the Caribbean
 Earn foreign exchange from the products that are exported
 One primary product can be used to create a number of secondary products
 Creation of jobs in different areas other than the extractive industry
 Possible increase in investment in the manufacturing sector
 Improvement in the country’s Gross Domestic Product and so possibly its
standard of living.
Disadvantages of involvement in the
secondary sector

 The profit motive of manufacturing firms could lead to depletion of some

primary products
 A number of manufacturing companies are often multinationals which
repatriate their profits instead of reinvesting in the host country
 Some of the raw materials used in the secondary sector have to be imported
and this uses up the foreign exchange earnings of the country.
Tertiary sector

 The tertiary sector does not produce goods, but instead provides services.
Over the last decade the Caribbean business environment has become more
service oriented. Some of these services include tourism, financial services,
transportation and management services.
 In recent times, the tertiary sector has become one of the main contributors
to Caribbean countries’ Gross Domestic Product, with tourism being the most
popular. We have seen improvements in the banking sector, transportation,
insurance, telecommunications, courier services and money services, among
others.
Advantages of involvement in the
tertiary sector
 Generates foreign exchange, especially from tourism
 Creation of jobs, especially because the sector is mostly labour intensive
 The sector does not depend heavily on primary products and so would not
deplete the countries’ natural resources
 As mentioned, the sector contributes to the Gross Domestic Product of
countries
 Less pollution generated when compared with the primary and secondary
sectors.
Disadvantages of involvement in the
tertiary sector
 Services as a whole are very volatile and so may not be sustainable
 It may require high training costs to ensure that the
 service being offered is the same regardless of location
 Services such as tourism can impact on a country’s
 culture and values and may even lead to a change in people’s social behaviour.
Economic sectors and legal structures

The big economic problem lies in the fact that the resources of this world,
though plentiful, are not sufficient to meet humans’ unlimited wants. This
condition is known as scarcity and, as a result, businesses, government and
households have to make choices. The three main economic questions that are
usually asked in any economy are:
What to produce?
How to produce?
For whom to produce?
Governments and firms must make the necessary decision on each question. In
order to make these decisions, different business organisations have been
created. Each organisation may react in different ways to these questions. The
organisations can be classified into private-sector and public-sector
organisations. Each of these organisations within the private or public sector
carries a particular legal structure. It is the legal structure that determines the
following:
 How profits or losses are shared
 The firm’s tax obligation
 Ease of formation
 Funding
 Who bears the legal liabilities
 Continuity of existence.
Choosing the most appropriate legal structure for a business depend heavily on
the aim of the business owner. For example, a person who wants to start a
business and keep full control will start a sole proprietorship, while another
person who wants financial support for start-up from a number of people is likely
to start a company or a partnership. At the same time, a sole proprietorship
business may not be suitable for a very large multinational firm because of its
size and the geographical area it decides to span
The private sector

 The private sector consists of businesses that are owned by individuals or

groups of individuals with the main aim of making profits. These businesses
differ in size and structure and range from sole proprietorship to large
companies. The following are the different types of private-sector
organisations.
Sole Trader or Proprietor

This is the oldest and probably the most common form of business organisation.
It ranges from the street-side vendor to large businesses, for example a doctor’s
private practice. A sole trader refers to a business owned and operated by one
individual. This person manages the business, makes all the decisions and
enjoys all the profits or bears all the losses. While there is only one owner,
he/she may employ other people to carry out different functions for which those
people would be paid.
A sole trader is the simplest business to form as there are few or no legal
requirements. The business is generally unregistered. However, in Jamaica and
other Caribbean countries the sole trader is required to register the business or
trading name. In addition, depending on the product being traded, the sole
trader may be required to apply for different licences. For example, a person
running a bar or pub is required to obtain a spirit licence; likewise, someone
selling food must obtain a food handler’s permit.
 Main features of a sole-trader business
 • Simplicity of formation
 • The owner is in control of the business
 • Requires little start-up capital
 • The owner and the business are one (they are the same legal entity)
 • Lack of continuity.
The sole trader raises finance from different sources, however, these options
may be limited. A person wanting to start a sole-trader business may opt to
use his/her own personal savings, obtain bank loans or borrow from family
and friends. The sole trader may also find that it is difficult to acquire a loan
from lending institutions because of the risks involved or the lack of collateral
available. In some cases, even when such a loan is granted, it comes with vey
high interest rates.
Advantages of a sole-trader business

 It is easy to form, as there are few or no legal requirements

 Decisions can be made quickly
 The owner enjoys all the profits Sole trader or proprietor
 With the exception of tax returns, business affairs are private
 Can be most suitable where capital is scarce
Disadvantages of a sole-trader business

 The owner has unlimited liability, i.e. he/she stands to lose personal assets if
the business fails
 I Difficulty in sourcing finance
 The business dies with the owner, hence there is a lack of continuity
 It may be difficult to achieve economies of scale
 There may be great demand on the owner’s time and attention.
  
Partnership
partnership is defined as a business where two to twenty people work together towards a
common goal of making profits. The partners are often the main source of finance even though
the business can source funding from financial institutions. Like sole proprietorship, a
partnership is not required to be registered. However, it is required to register its trading name.
The partnership is governed by the agreement that was drafted at its outset, known as a
partnership deed. This is a legal document which amounts to a binding contract among the
partners. The document stipulates how profits or losses should be shared; the rights of each
partner; rules for taking in new partners or dissolution of the partnership; and the capital to be
contributed by each partner, among other things. While preparing a partnership deed is
advisable, it is not required by law and so some partnerships do exist without one. In such case,
the partnership is governed by the Partnership Acts of 1890 and 1907. The Partnership Act 1890
stipulates that:
• Profits and losses should be shared equally
• Each partner may take part in the management of the business
 No partner should receive a salary for working in the business
• No partner is entitled to any interest on his/her capital.
While the Partnership Act 1907 did not disturb the rules set down in the previous
Act, it added the new concept of a limited partnership. This Act stipulated the
following:
A limited partnership shall not consist of more than twenty people, and must
consist of one or more people, called ‘general partners’, who shall be liable for
all debts and obligations of the firm, and one or more people to be called
‘limited partners’
• A limited partner shall not, during the continuance of the partnership, either
directly or indirectly, draw out or receive any part of his contribution
• A limited partner shall not take part in the management of the partnership
business, and shall not have power to bind the firm.
Sometimes a partner may invest capital in the business but does not want to take
any active part in how it is run. Such a partner is referred to as a ‘sleeping
partner’.
Main features of partnership
• Unlimited liability on partners (except for a limited partner)
• Two or more members
• Profits/losses are shared
• Few legal requirements
• No separation between business and partners. Partnerships are prevalent in,
but not limited to,
accounting and law firms throughout the Caribbean. These include Price-
Waterhouse-Coopers, Deloitte & Touche, George Walton Payne & Co, and
Fitzwilliam Stone, FurnessSmith & Morgan.
 
Advantages and disadvantages of
Partnership
Advantages:
They are easy to form, as there are few or
no legal requirements
Each partner contributes to the capital of
the business
 Responsibilities may be shared among the
partners
Itallows for division of labour, as partners
may have specialised skills
There
is privacy of affairs, as it is not
compulsory to publish the partnership’s
accounts
Disadvantages:
Decision making may be tedious and slow
There might be conflict among partners
There is a lack of continuity — that is, once
a partner leaves the partnership it has to be
dissolved. The problem of limited liability
may have led to the
enactment of the Limited Liability
Partnership Act 2000. This Act states that a
partnership may be formed where all of its
partners have limited liability.  
 According to the Act:
 A limited liability partnership is a body corporate (with legal personality
separate from that of its members) which is formed by being incorporated
under this Act The members of a limited liability partnership have such
liability to contribute to its assets in the event of its being wound up as is
provided for by virtue of this Act. The partnership must submit the required
documents to the Registrar of Companies, who will regulate the partnership.