Chapter 2- Business Sectors and types of business

Question 1

`What does it mean if a business is ‘multinational’?

Answer 1

If business’s have operations in other countries as well as nationally in the UK.

Question 2

What is the definition of the chain of production?

Answer 2

Stages that a product passes through until it reaches the final consumer.

Question 3

What happens when a product passes along the chain of production?

Answer 3

• It gets value added onto it as it becomes worth more because of the business activity at each stage of the chain.
• Many business’s may be involved in the chain of production at the different stages.

Question 4

What are the 3 stages of production?

Answer 4

• Primary sector
• Secondary sector
• Tertiary sector

Question 5

Primary sector

Answer 5

• Business’s in the primary sector are concerned with the extractive industries.
• These include farming, forestry, fishing and mining as well as oil and gas extraction.

Question 6

Secondary sector

Answer 6

• Business’s in the secondary sector are concerned with manufacturing.
• Turning raw materials into semi-finished and finished products.
• E.g. Production of an engine and then the final assembly of components into a complete car.
• Also includes the construction industry.
• These include, building houses, factories, office blocks and roads.

Question 7

Tertiary Sector

Answer 7

• Business’s in the tertiary sector are concerned with the output of services ( they still count as production even if there is no actual finished product to see).
• They include a wide range of tertiary activities from retailing, banking, and transportation.

Question 8

What are the proportions of each sector in the output of the UK?

Answer 8

• Primary (6%)
• Secondary (14%)
• Tertiary (80%)

Question 9

What is one feature of an advanced economy?

Answer 9

A large tertiary sector

Question 10

What is the defintion of deindustrialisation?

Answer 10

The decline in the size of the secondary sector of the economy.

Question 11

What happens if manufacturing is thriving and why?

Answer 11

• There is likely to be a positive effect on the other 2 sectors.
• Because there will be a need for more raw materials, inputs and services to support the business.

Question 12

Why does the UK need a successful manufacturing sector?

Answer 12

To generate the export earnings.

Question 13

What is the private sector?

Answer 13

• Business’s owned and run by private individuals.
• Usually for profit
• Referred to as ‘private enterprise’.

Question 14

What is the public sector?

Answer 14

• Business’s and organisations owned and run by local or central government.
• Objective is to provide a service rather than make a profit.
• Referred to as ‘public enterprise’.

Question 15

What are examples of the public sector?

Answer 15

• National Health Service (NHS)
• British Broadcasting Corporation (BBC)
• The National Nuclear Laboratory (NNL).

Question 16

Whose in the private sector?

Answer 16

• Sole trader
• Partnership
• Limited companies (Ltd & Plc).

Question 17

Why is the legal structure of a business important for the effects it has on ?

Answer 17

• Ownership and control of the business.
• Responsibility for any debts.
• Sources of finance available.
• The objectived pursued.

Question 18

What is a Sole trader?

Answer 18

• Simplest form of a business organisation.
• It owns the business and makes all the decisions affecting it.
• It doesn’t mean that the business has only 1 person working there- they can employ a number of people.
• Sole trader is in overall control.
• Business and owner are inseparable so it’s ‘unicorporated’.

Question 19

Advantages of being a sole trader?

Answer 19

• They don’t have to consult with anyone so making decisions is quick and easy.
• A sole trader keeps all the proft (after tax).
• There are a few legal requirements when setting up as a sole trader so it’s possible to start a business quite quickly with relatively little capital.
• A sole trader can’t issue shares so they can’t be subject to a takeover.

Question 20

Disadvantages of being a Sole trader?

Answer 20

• They are fully resposible for all it’s debts so if it runs into financial difficulty they may be forced to sell his or her personal possessions. (unlimited liability).
• They have to be the ‘Jack of all trades’ so they single-handedly must perform all the business’s functions. (if one is neglected the business is going to suffer).
• If the sole trader dies, the business also comes to an end (no continuity).
• Limited opportunities for growth as raising capital for expansion for a small business is risky.

Question 21

What is a partnership?

Answer 21

• Whenever 2 or more people run a business.
• The law requires a minimum of two and a maximum of 20 partners.
• It isn’t a legal entity in it’s own right.

Question 22

What is a Deed of Partnership?

Answer 22

It is a legal document that governs the running of this type of business.

Question 23

What matters does a Deed of Partnership set out and clarify?

Answer 23

• Responsibilities and duties of each partner.
• Arrangements to cover absence, sickness or holidays.
• How decisions are to be made within the partnership.
• The arrangements for finance.

Question 24

What happens if the Deed of Partnership doesn’t exist ?

Answer 24

The business will be governed by the Partnership Act of 1890 stating that the responsibility for running the business and the distribution of profits and losses are to be shared equally among the partners.

Question 25

Advantages of partnerships?

Answer 25

• It is easy to establish.
• Partners can specialise in what they do best.
• Losses are shared.
• Additional partners means there will be more capital so expansion will be easier.
• They pay income tax so the financial state of the business can be kept private.

Question 26

Disadvantages of partnerships?

Answer 26

• Decision making is slower and there is a possibility of disagreement.
• They have unlimited liability.
• Losses are shared but so are profits.
• The legal restriction of the maximum number of partners means that the business can still lack capital for expansion.
• Partnership can automatically end after the departure, resignation or death of a partner so they should make provision by having a written agreement about what will occur if this happens.

Question 27

What is a ‘sleeping’ partner?

Answer 27

When partners may have limited liability if they contribute money but take no active part in running the business. A partnership must have at least one person with unlimited liability.

Question 28

What do both sole traders and partnerships pay?

Answer 28

Income tax

Question 29

What is a limited liability partnership?

Answer 29

• They became legal in 2001.
• They combine some features of partnerships with some of those with limited companies.
• It is a separate legal entity so its owners have limited liability.
• The owners of LLP’s are called members rather than partners.
• Before 2001, if a group of people wanted limited liability they had to form a company.
• The creation of LLP’s means that it is possible to have the advantages of a partnership combined with limited liability.
• But limited liability comes at a price so their required to file their annual accounts at a companies house so their available publicly for competitors to view.

Question 30

What are the differences between companies and other types of business organisations?

Answer 30

1. Incorporation- the business exists in it’s own right (those who own the company (the shareholders) are not the same as those who run it for them (directors).
2. Shares-Companies can raise capital via the issue of shares.
3. Limited liability- If a company goes into liquidation because of financial problems, it’s shareholders have limited liability so they only lose their shares so at least the shareholders aren’t liable for the business’s debts but it could mean a loss of a significant amount of money.

Question 31

What is a ‘share’?

Answer 31

• Buyers own a share in a company.
• They become one of it’s owners.
• Companies issue shares to raise money.
• Investors buy shares with two aims
  1. receiving a return on their money (dividend)
  2. making a capital gain (selling their shares for a higher price than they bought them at).

Question 32

What are the differences between private and public limited companies?

Answer 32

• Public companies are larger than private companies.
• A public company is a ‘plc’ and a private company is a ‘ltd’.
• A plc can sell shares on the stock market but a ltd can’t so plc shares can be bought by anyone but in a ltd shares must be sold through private negotiation and can’t be advertised for sale to the public.
• A plc can be tookover as it’s shares are availble for anyone to buy but a ltd can ‘sell out’ to an investor but can’t be taken over.
• A plc is required to have a minimum share capital of £50,000 but a ltd doesn’t have a minimum.

Question 33

What are the similarities of private and public companies?

Answer 33

1. Voting- Voting by shareholders is ‘one vote per share meaning an individual or a relatively small group of people can own enough shares to outvote all the others.
2. Information- Shareholders must receive a copy of the Company’s report and accounts every year. They are also entitled to attend the annual general meeting (AGM) where they receive a report from the directors on the state of the company.
3. Directors- Shareholders elect a board (a group) of directors to run the company on their behalf.

Question 34

What are advantages of companies?

Answer 34

• Access to large amounts of capital through the ability to issue shares so there are greater opportunities for growth.
• Limited liability for shareholders encourages people to invest in the company.
• Continuity as a company is a separate legal entity and so does not come to an end when the original owner dies.
• Investors such as banks often regard companies as less risky so it could mean better terms for borrowing money.

Question 35

What are disadvantages of companies?

Answer 35

• Setting up a company can be expensive
• For a business to be established as a company two important legal documents need to be completed to protect the interests of the shareholders (Memorandum of Association and the Articles of Association) so completing them to a required standard means that it is slower and more complicated to establish a company.
• Company accounts are not private so it is difficult to keep the business’s financial details hidden from competitors as they are on access at companies house.
• Danger of a takeover as the original owners could lose control if large blocks of shares are bought up by other investors.

Question 36

What is the memorandum of association?

Answer 36

It deals with the companies relationship with the outside world e.g. what products it will sell, whether it will be a private or public company.

Question 37

What is the articles of association?

Answer 37

It deals with the internal running of the company e.g arrangements for the election and removal of directors.

Question 38

What is the third sector?

Answer 38

• Nor in the public or private sector
• Include charities, community groups
• They are motivated by the desire to achieve social goals rather than the desire to maximise profits.
• A profit may be made but profit is reinvested in order to improve the service being provided.