Ch 2 Business structure Flashcards
What are the 3 economic sectors and define then?
- Primary sector: are extractive industries that gather raw materials
- Secondary sector: industries that manufacture raw materials extracted from primary sector into tangible products
- Tertiary sector: provide intangible services
Definition of a public sector
- Comprises organisations accountable to and controlled by central or local government
- Produces public goods which are non rivalry and non excludability
Definition of a private sector
- Comprises businesses owned and controlled by individuals or groups of individuals
- Produces private goods which have rivalry and excludability
Definition of merit goods
- Goods and services that the government feels that people will underconsume and ought to be subsidied/provided for free
- They are on a basis of concept of need rather than willingness to pay
- E.g. education, vaccination
Definition of demerit goods
- Goods/services whose consumption is considered unhealthy and socially undesirable due to the negative effects on consumers and negavive externalities
- E.g. cigarettes, alcohol, junk food
Definition of unlimited and limited liability
- Unlimited liability: means the sole trader is personally responsible for all the debts of the business. The debts are not limited and might endanger personal possessions
- Limited liability: a legal protection which limits the debts owed by an individual owner of a company to the sum of money they have invested.
Definition of a sole trader
A business owned, controlled and financed by one person
Advantages of sole trader
- Easy to set up
- Owner has complete control
- Owner keeps all profit
- Able to establish personal relationships with staff and customers
- Less capital required
- Business can be based on interests/skills
Disadvantages of sole trader
- Unlimited liability
- Narrow range of skills (no specialisation)
- Ill health and holidays can affect the running of the business
- Hard to raise finance
- Competition against bigger firms
- Has to be responsible for all aspects of management
Define partnership
a business formed by 2 to 20 people to run the business together, shared capital investment and responsibilities
Advantages of partnership
- Additional capital available
- Risks and responsibilities are shared
- Larger range of skills (specialisation)
- Shared decision making
Disadvantages of partnership
- Unlimited liability
- Profits are shared
- Sleeping partners
- Disagreements
Difference between ownership and control
- Owners are shareholders who invests capital into a limited company, does not manage it or control it
- Directors are people who control the business and take directions from owners
- Once a year, an AGM (Annual General Meeting) is held to discuss the business’ objectives
What are the legal formalities when setting up a company?
- Memorandum of Association: states the name of the company, the address of the headquarter, the maximum share capital for which the company seeks authorisation and the declared aims of the business
- Articles of Association: covers the internal workings and control of the business - e.g. names of directors and the procedures to be followed at meetings
Definition of a private limited company
a small business owned by shareholders. Shares can only be bought directly from the company with permission. Usually quite a small number of shareholders (may be run by a family).
Advantages of a private limited company
- Choose shareholders (trust)
- Separate legal personality (ownership and control)
- Limited liability
- Greater status than an unincorporated business
Disadvantages of a private limited company
- Legal formalities
- Less capital raised, not sold to general public
- End of year accounts must be sent to Companies House (private accounts and affairs can’t be kept private)
Definition of a public limited company
Often a large business owned by shareholders. Shares can be bought and sold on a stock exchange, anyone can buy them.
Advantages of a public limited company
- Separate legal personality
- Limited liability
- Access to large amount of capital due to flotation
Disadvantages of a public limited company
- Legal formalities
- Fluctuation of share prices
- Legal requirements concerning disclosure of information to shareholders and the public
- Compete against other plcs for selling of shares
- Profits distributed to shareholders
Definition of franchise
A business based upon a name, logo and trading method of an existing successful business
Advantages of a franchise
- Fewer chances of failing as the business have a reputation, product being used
- Advice and training offered by franchisor
- National/ International advertising paid by franchisor
- Supplies obtained are quality-checked
- Franchisor agrees to not open another branch in the area
Disadvantages of a franchise
- Initial fee to franchisor can be expensive
- Must agree to licence
- A royalty must be paid each year (a percentage of the profits generated)
- No choice of supplies or suppliers
Definition of cooperatives
A business that is owned and run jointly by its members, who share the profits or benefits. Controlled by stakeholders
Advantages of cooperatives
- All members contribute to running of the business
- All members are valued => motivated
- Profits are shared equally among members
- Buy in bulk => economies of scale
Disadvantages of cooperatives
- Decision making can be time consuming
- Disagreements between members
- Capital shortages because no sale of shares to general public is allowed
- Requires professional management skill
Definition of a joint venture
two or more business work together on a particular project and create a separate business division to do so
Advantages of a joint venture
- Costs and risks are shared (especially when developing new products is costly/ in another country
- Different companies have different strengths
- Separate identities - not a merged business
Disadvantages of a joint venture
- Styles of management and culture might be different
- Disagreements in decision making process
- Business failure of one of the partners would put the whole project at risk
What are the problems when you change from being a sole trader to a partnership?
- Sharing profits
- Interference in decision-making
- Bad decision of one partner affects all partners
What are the problems when you change from being an ltd to being an plc?
- Owners may lose control
- Legal work required
- Financial accounts have to be made public
- Decrease in privacy
