Chapter 2 - Business Structure Flashcards
Define primary sector business activity?
Firms engaged in farming, fishing, oil extraction and all other industries that extract natural resources so that they can be used and processed.
Define secondary sector business activity?
Firms that manufacture and process products form natural resources including baking, clothes-making and construction.
Define tertiary sector business activity?
Firms providing services to customers and other businesses such as retailing, transport, insurance and banking.
Define quaternary sector business activity?
businesses providing information services such as computing, web design and R+D.
What are 2 ways in which the relative importance of economic sectors measured?
- Employment levels
- Output levels
(as a proportion of the whole economy)
Define industrialisation
The growing importance of secondary sector manufacturing industries in developing countries
What are the benefits of industrialisation? (5)
- Total national output (GDP) increases, raises average standards of living.
- Increased output of goods can result in lower imports and higher exports.
- Expanding manufacturing businesses will result in more jobs created.
- Expanding and profitable firms pay more tax to the government
- Value is added to the country’s output of raw materials rather than exporting these as basic, unprocessed products.
What are the problems caused by industrialisation? (3)
- It encourages a huge movement of people from the countryside to towns = housing and social problems.
- Import of raw materials and components are often needed. Increase country’s import costs.
- Much of the growth is due to the expansion of multinational companies. Negative impact on the economy.
Define deindustrialisation
The decline in the importance of the primary and secondary sectors and an increase in the relative importance of the tertiary and quaternary sectors.
Explain 2 causes of deindustrialisation
- Rising incomes associated with higher living standards. Consumers spend much of their extra income on services rather than goods, e.g. holidays. \
- Manufacturing businesses in developed countries face more competition as a result of increasing global industrialisation. Rivals tend to be more efficient, using cheaper labour, therefore the rising import of goods takes the market away from domestic secondary sector firms.
Explain the consequences of deindustrialisation (4)
- Job losses in agriculture, mining, manufacturing
- movement of people to towns and cities
- job opportunities in service industries
- increased need for retraining programmes to allow workers to find employment in service industries
Define “public corporation”
A business enterprise owned and controlled by the state or government. They provide important goods and services that are too significant to be left to private businesses e.g. health, education and defence.
Explain the advantages of a public corporation (3)
- managed with social objectives
- loss making services are kept operating if the social benefit is great enough
- finance is raised from the government.
Explain the disadvantages of a public corporation (3)
- tendency towards inefficiency due to a lack of strict profit targets
- Subsidies from government can encourage inefficiency
- The government may interfere in business decisions for political reasons.
Define “mixed economy”
Economic resources are owned and controlled by both private and public sectors
Define “free market economy”
Economic resources are owned largely by the private sector with very little state intervention
Define “command economy”
Economic resources are owned, planned and controlled by the state.
Define “sole trader”
A sole trader is a business owned and controlled by one person. They provide the permanent finance and in return have full control of the business and are able to keep all profits.
Explain the disadvantages of being a sole trader (6)
- Unlimited liability
- Competition from bigger firms
- The owner is unable to specialise in areas of the business that are most interesting, as they are responsible for ALL aspects of management
- Difficult to raise additional capital
- Long hours necessary to make business pay
- Lack of continuity as no separate legal status
Explain the advantages of being a sole trader (6)
- Easy to set up, no/little legal formalities
- Owner has complete control
- Owner keeps all profits
- Owner chooses their times and patterns of working
- Owner can establish close relationships with staff and customers
- The business can be based on the skills and interests of the owner.
Define “unlimited liability”
Business owners have full legal responsibility for the debts of the business
Define “partnership”
A business formed by two or more people to carry on a business together with shared capital investment and, usually, shared responsibilities.
Explain the advantages of a partnership (5)
- Partners specialise in different areas
- Share decision making
- Additional capital is injected by each partner
- Business losses shared
- Greater privacy, fewer legal requirements than corporate organisation
Explain the disadvantages of a partnership (6)
- All partners have unlimited liability
- Profits are shared
- No continuity
- All partners are bound by the decisions of any one of them
- Not possible to raise capital by selling shares.
- As a sole trader, taking on partners, lose decision making independence.
Explain the 3 distinct and important features that differentiate an incorporate and unincorporated business.
- Limited Liability: The only liability, or potential loss, a shareholder has, if the company fails, is the amount invested in the company, not the total wealth of the shareholder.
- Legal personality: A company is recognised in law as having a separate legal identity, separate from owners. The company would be taken to court, not the owners.
- Continuity: Death of owner/director does not lead to break-up or dissolution. Ownership continues through inheritance of shares.
Define “limited liability”
The only liability, or potential loss, a shareholder has, if the company fails, is the amount invested in the company, not the total wealth of the shareholder.
Define “private limited company”
A business that is owned by shareholders who are often of the same family. This company cannot sell shares to the general public. Incorporated business, all shareholders have limited liability.
Explain the advantages of a private limited company (6)
- Shareholders have limited liability
- Separate legal identity
- Continuity in the event of the death of a shareholder
- Original owner still able to retain control
- Company able to raise capital from the sale of shares to family/friends/employees.
- Greater status than unincorporated business.
Explain the disadvantages of a private limited company (4)
- There are legal formalities involved
- Capital cannot be raised by the sale of shares to the general public.
- Quite difficult for shareholders to sell shares.
- End-of-year accounts are sent to the government office responsible for companies. Available for public inspection.
Define “public limited company”
A company whose shares are traded on the stock exchange and can be bought and sold by the public. Incorporated business, all shareholders have limited liability.
Explain the main difference between private and public corporations
Separation of ownership and control
The original owners of a business that converts to private company structure are usually still able to maintain majority of shares and continue to exercise management control.
Unlikely with public limited companies because most shares will be issued to a large number of individuals and institutions as investors. These shareholders own the company, but at the AGM they appoint a board of directors who control the management and decision making of the business.
Explain the advantages of a public limited company (5)
- Limited liability
- Separate legal identity
- Continuity
- Easy for shareholders to buy and sell shares, encouraging investment
- Substantial capital sources can be accessed due to ability to issue a prospectus to public and to offer shares for sale (called flotation)
Explain the disadvantages of a public limited company (6)
- Formation entails legal formalities
- High costs of paying for advice form business consultants when creating plc.
- Share prices are subject to fluctuation, sometimes for reasons beyond business control
- Legal requirements concerning the disclosure of information to shareholders and the public (e.g. annual publication of detailed report and accounts)
- Risk of takeover due to avaidability of shares on stock exchange.
- Directors may be influenced by short-term objectives of major investors.
What two legal documents are required before a company may be established, to protect investors and creditors?
- Memorandum of Association
- Articles of Association
Define the term “Memorandum of Association”
A document required to establish a company.
It states:
-> the name of the company
-> the address of the head office through which it can be contacted
-> the maximum share capital for which the company seeks authorisation
-> the declared aims of the business
Define the term “Cooperative”
A cooperative is a jointly owned business that is operated and controlled by members for their mutual benefit, to produce or distribute goods/services. E.g. farmers’ cooperative.
In a cooperative the owners are often the workers themselves. The profits are shared. Workers may vote for a director. In smaller cooperatives, workers may also manage the business.
Define the term “Articles of Association”
A document required to establish a company.
This document covers:
-> the internal workings and control of the business
-> the names of directors,
-> the procedures to be followed at meetings.
Explain the features of a cooperative (3)
- All members can contribute to running the business and sharing the workload, responsibilities and decision making.
- All members have 1 vote at meetings
- Profits shared equally among members
Explain the advantages of a cooperative (3)
- Buying in bulk
- Working together to solve problems and take decisions
- Good motivation for all members to work hard as they will benefit from shared profit.
Explain the disadvantages of a cooperative (3)
- poor management skills, unless professional managers employed.
- Capital shortages because sale of shares to non-members is not allowed.
- Slow decision-making if all members are to be consulted on important issues.
Explain the term “franchise”
A franchise is the legal right for a franchisee to use the name, logo, marketing methods and trading systems of an existing successful business.
Explain the advantages of a franchise (5)
- Fewer chances of the business failing because of using an established brand name and product.
- Advice and training offered by franchiser
- Franchisor pays for national advertising
- Supplies obtained from established and quality checked suppliers.
- Franchisor agrees not to open another branch in the local area.
Explain the disadvantages of a franchise (5)
- A share of profits/revenue has to be paid to the franchisor each year
- Initial franchise licence fee can be expensive
- Local promotions may still have to be paid for by the franchisee
- Franchisee cannot choose which suppliers / supplies to use.
- Strict rules over pricing and layout of the outlet reduce franchisee’s control over their own business.
Explain the term “joint venture”
A joint venture is when two or more businesses agree to work closely together on a particular project and create a separate business division to do so.
Explain 3 reasons for joint ventures
- Costs and risks of a major new business venture shared. Major consideration as cost of developing new products is rising rapidly.
- Different companies have different strengths and weaknesses, could fit well together.
- Might have major markets in different countries and they could exploit these with the new product more effectively than if both decided to do it alone.
Define the term “social enterprise”
A business that aims to make a profit in socially responsible ways. They mainly have social objectives and re-invest most of its profits into benefiting society rather than maximising returns to owners.
Explain 3 features of social enterprises
- They directly produce goods or provide services
- They have social aims and use ethical ways of achieving them.
- Need to make a profit to survive as they cannot rely on donations as charities do.
Explain the advantages of changing from one form of ownership to another (e.g. sole trader -> private limited company) (3)
- Access to more finance
- Gaining legal identity
- Protecting owner’s capital through limited liability
Explain the disadvantages of changing from one form of ownership to another (3)
- Legal costs and formalities
- Some loss of control and ownership by original owner
- Profits are shared.
