Business Structure 1.2

Question 1

Explain the activity of primary sector businesses.

Answer 1

Primary sector businesses extract natural resources so that they can be used and processed by other sectors.

Question 2

Explain the activity of secondary sector businesses.

Answer 2

Secondary sector businesses make use of the natural resources and convert them into finished products by manufacturing.

Question 3

Explain the activity of tertiary sector businesses.

Answer 3

Tertiary sector businesses provide services to consumers and other businesses.

Question 4

Define the term “Private Sector”

Answer 4

Private sector businesses are owned and operated by individuals or a group of individuals.

Question 5

Define the term “Public Sector”

Answer 5

Public sector businesses are owned and operated by the government.

Question 6

Define the term “Mixed Economy”

Answer 6

An economy where the economic resources are owned and controlled by both private and public sectors.

Question 7

Define “Free-Market Economy”

Answer 7

An economy where the economic resources are owned and controlled largely by the private sector with very little intervention by the government/state.

Question 8

Define “Command Economy”

Answer 8

An economy where the economic resources are owned, planned and controlled by the state.

Question 9

Define the term “Sole Trader”

Answer 9

A business that is owned and operated by a single individual.

Question 10

Define the term “Partnership”

Answer 10

A business that is owned and operated by two or more people.

Question 11

List 3 Advantages of a Sole Trader.

Answer 11

Answers may include :
- Easy to set up as it has no legal formalities
- Owner has complete control
- Owner is able to keep all the profits
- Owner is able to chose time and patterns of working
- Owner is able to establish close personal relationships with staff (if any of them are employed) and customers
- Business can be based on the interests or skills of the owner, rather than working as an employee for a larger firm.

Question 12

List 3 Disadvantages of a Sole Trader.

Answer 12

Answers may include :
- Unlimited liability, the owners personal assets can be potentially at risk.
- Often faces intense competition from larger businesses.
- Owner is unable to specialize in areas of the business that are most interesting, the owner must be responsible for all aspects of management instead.
- Difficult to raise additional capital
- Long hours often necessary to make business pay off
- Lack of continuity, if the business owner dies, the business will cease to legally exist.
- Might become overwhelming for the owner as they do not have any partners to delegate compared to partnership.
- Cannot benefit from other partners expertise compared to a partnership.

Question 13

List 3 Advantages of a Partnership.

Answer 13

Answers may include :
- Partners may specialize in different areas of business management. This will allow them to benefit from each other’s skills.
- Shared decision making.
- Additional capital is injected by each partner.
- Business loss is shared between all the partners.
- Fewer legal formalities than a corporate organization.

Question 14

List 3 Disadvantages of a Partnership

Answer 14

Answers may include :
- Unlimited liability.
- Profits are shared
- No continuity, if one of the partners die the business will have to be reformed.
- All partners are bound by each other’s decisions.
- Not possible to raise capital by selling shares

Question 15

Define the term “Limited Liability”

Answer 15

The only liability a shareholder has in an event where the business fails is the money the shareholder invested into the business.

Question 16

Define the term “Private Limited Company”

Answer 16

A private limited company is a business that is owned by shareholders.

Question 17

A private limited company can sell shares to the public.

Answer 17

False

Question 18

Define the term “Public Limited Company”

Answer 18

A limited company with legal rights to sell shares to the general public.

Question 19

A public limited company can sell shares to the public.

Answer 19

True

Question 20

Define the term “Shareholder”

Answer 20

An individual or institution that owns shares in a limited company.

Question 21

List 3 Advantages of a Private Limited Company.

Answer 21

Answers may include :
- Shareholders have limited liability.
- Separate legal identity.
- Continuity in an event where one of the shareholders die.
- Original owner is still often able to retain control
- Able to raise capital from the sale of shares to family, friends, and employees.

Question 22

List 3 Disadvantages of a Private Limited Company.

Answer 22

Answers may include :
- Legal formalities are involved when establishing the business.
- Capital cannot be raised by selling shares to the public.
- Quite difficult for shareholders to sell shares.

Question 23

List 3 Advantages of a Public Limited Company.

Answer 23

Answers may include :
- Limited liability
- Separate legal identity
- Continuity in an event where one of the shareholders die
- Shares can be easily bought and sold. This encourages investments in PLCS
- Able to raise capital from selling shares to the public

Question 24

List 3 Disadvantages of a Public Limited Company.

Answer 24

Answers may include :
- Legal formalities are involved when establishing the business.
- Cost of business consultants and financial advisers when creating such a company.
- Fluctuation of share prices - sometimes for reasons beyond business control such as the state of the economy.
- Legal requirements concerning disclosure of information to shareholders and the public, for example annual publication of detailed report and accounts.

Question 24

Define the term “Franchise”

Answer 24

A business that has the permission to use the name, logo, and trading systems of an already existing successful business.

Question 25

List 3 Advantages of a Franchise.

Answer 25

Answers may include :
- Fewer chances of new business failing as an established brand and product are being used.
- Advice and training are offered by the franchiser.
- National advertising paid for by franchiser.
- Supplies obtained from established and quality checked suppliers.
- Franchiser agrees not to open another branch in the local area.

Question 26

List 3 Disadvantages of a Franchise.

Answer 26

Answers may include :
- Share of profits or revenue has to be paid to the franchiser each year.
- Initial franchise license fee can be expensive.
- Local promotions may still have to be paid for by franchisee.
- No choice of supplies or suppliers to be used
- Strict rules over pricing and layout of the outlet reduce owners control over their own business.

Question 27

Define the term “Cooperative’

Answer 27

A cooperative is a jointly owned business that produces goods or services operated by members for their mutual benefits.

Question 28

Define the term “Joint Venture”

Answer 28

Two or more businesses that agree to work closely together and create a separate business division to do so.

Question 29

Define the term “Public Corporation”

Answer 29

A business enterprise that is owned and operated by the government.

Question 30

List 3 Advantages of a Public Corporation.

Answer 30

Answers may include :
- Managed with social objectives rather than profit objectives
- Loss making services may still be kept up if the social benefit is great enough.
- Finance is mainly from the government.

Question 31

List 3 Disadvantages of a Public Corporation.

Answer 31

Answers may include :
- Tendency towards inefficiency due to the lack of strict profit objectives.
- Subsidies from government can also encourage inefficiency.
- Government may interfere with business decision making for political reasons.

Question 32

List 2 Advantages of a Joint Venture

Answer 32

Answers may include :
- Able to benefit from the other company’s expertise and local knowledge.
- Less risk will be associated by having another company.
- More capital will be available.

Question 33

List 2 Disadvantages of a Joint Venture

Answer 33

Answers may include :
- The companies may have different leadership, management, and operation. This may lead to disagreements which will hinder their performance and reduce efficiency.
- If a company performs poorly, the companies in the joint venture will have a bad reputation.

Question 34

Explain two advantages that a business in the public sector may have that a business in the private sector may not.

Answer 34

Answers may include :
- Possibly easier access to finance because they are funded by a government.

• They are not under pressure to make a profit because they are often/usually providing essential goods and/or services.
• They do not have to pay dividends to shareholders.
• They are frequently large businesses that benefit from economies of scale.

Question 35

Explain why a business might remain a private company rather than changing to a public limited company.

Answer 35

Answers may include :
- Want to retain distinctive values and cultures
- More likely to have shareholders more willing to invest and postpone dividend payments.
- Private limited companies may choose to remain private to avoid the expenses and scrutiny associated with being a public company
- Want to maintain control

Question 36

Define the term “Memorandum of Association”

Answer 36

This states the name of the company, the address of the head office through which it will be contacted, the maximum share capital for which the company seeks authorization and the declared aims of the business.

Question 37

Define the term “Articles of Association”

Answer 37

This document covers the internal workings and control of the business. For example, the names of directors and the procedures to be followed at meetings will be detailed.

Question 38

Define the term “Ethics”

Answer 38

Ethics is about the morality , rights and wrongs of business decisions as perceived by the stakeholders of the business.