CHAPTER 6 - Business Structure

Question 1

public sector

Answer 1

made up of organisations that are owned and run by the government

Question 2

Why do we need a public sector?

Answer 2

necessities include street lighting, defence (army, navy, air force) and the police.

Question 3

features of public goods (2)

Answer 3

• non-excludability;

* non-rivalry.

Question 4

Non-excludable

Answer 4

individuals cannot be prevented from enjoying the benefits of the provision of public goods or services. We all gain from having violent criminals kept behind bars, as the threat to our family’s well-being is reduced. No individual is excluded from this benefit. T

Question 5

Non-rivalry

Answer 5

one person gaining from consumption of a good or service does not prevent others from also gaining from the good or service.
If an individual eats an ice cream for example, then less ice cream is available for others to consume. Rivalry exists here.
However, if an individual benefits from gaining
justice in the Law Courts, this does not prevent any other individual from also being able to benefit from such a public service. They are not rivals for this service.

Question 6

Merit goods

Answer 6

There is another group of goods and services
that is supplied by both the private and public sectors, but if left to just the private sector the quantity supplied of these goods and services is likely to be much less than the level of provision which is most
efficient for the economy.

two best examples of these merit goods are education and health care.

These merit goods are said to have positive externalities. This means that the consumption of these goods will have positive effects not only on the individual that consumes them, but also on society in general.

Question 7

private sector

Answer 7

This is the part of the UK economy that is operated by businesses owned by shareholders or private individuals.

Question 8

Objectives of private businesses (5)

Answer 8

• Make a profit
• Increase shareholder value
• Survival
• Gaining market share
• Improving ethics

Question 9

Sole traders

Answer 9

Sole traders are the most popular form of business in the UK and are run by a single individual.

Question 10

benefits of sole trader (4)

Answer 10

• Easy to set up
• Costs are low
• No formal audited accounts are required
• Fast decision-making and may (within employment law) hire and fire as they please.

Question 11

disadvantages of sole trader (4)

Answer 11

• limited capital. Sole traders often rely on their own savings and perhaps secured business loans.
• a limited range of skills
• All the decisions and the future success of a business rest with one person.
• The sole trader has unlimited liability. This means that the business owner is liable for all the debts of the business, up to and including the value of all assets held.

Question 12

Partnership

Answer 12

Partnerships involve the joint ownership of a business. Normally there can be between two and 20 partners, but in certain businesses such as accountancy firms, there can be many more partners than this.

Question 13

advantages of partnership (4)

Answer 13

• wider skill range
• greater availability of capital
• shared decision-making
• increased expertise

Question 14

disadvantages of partnership (4)

Answer 14

• Capital can still be limited, with the same problems of raising external capital that a sole trader has.
  • The partners still have unlimited liability of partners (sleeping partners who invest, but take no part in the day-to-day running of the business can have limited liability).
  • partnerships are dissolved on the death of a partner and this can cause complications in re-establishing the partnership.
  • new partners can, and do, cause strains within a business.

Question 15

Types of Limited companies

Answer 15

two types of business structure that have limited liability:
• private limited companies (Ltd) e.g virgin, home bargains
• public limited companies (PLC). e.g. tesco, rolls royce

Question 16

Limited companies

Answer 16

These businesses exist separately from their owners, known as shareholders. Any legal action taken
against the business and not the shareholders. Shareholders are only liable to lose the amount of money they have invested in the business – their liability is limited.

Question 17

Public limited company PLC

Answer 17

Public limited companies trade their shares on the stock market. In the UK there are two main stock markets. These are:
• The Alternative Investment Market (AIM) – for smaller companies;
• The London Stock Exchange (LSE) – for larger businesses.

Shares on these stock markets are freely bought and sold

Question 18

Private limited company (ltd) advantages (6)

Answer 18

• limited liability;
• shares can only be sold if all the shareholders agree – control is not lost to outsiders;
• capital can be raised through increasing shareholders;
• other businesses and lenders are more likely to trade and invest;
• the business continues if one of the owners dies;
• possible tax advantages for the owners.

Question 19

Private limited company disadvantages (4)

Answer 19

• legal procedure in setting up, increases costs;
• profits have to be shared with shareholders;
• shares cannot be sold to the public which may restrict the investment of additional capital;
• financial information is in the public domain.

Question 20

PLC advantages (6)

Answer 20

• limited liability;
• the business continues if one of the owners dies;
• capital can be raised through selling shares to the public;
• easier to raise finance from banks and other lenders who are more willing to lend to PLCs;
• they are likely to have economies of scale;
• increased market presence and dominance.

Question 21

PLC disadvantages (6)

Answer 21

• increased costs in setting up;
• anyone can buy shares so there is an increased threat of losing control;
• increased legal requirements;
• the company accounts are in the public domain – more information has to be published than private
limited companies;
• divorce of ownership and control;
• the increased size may result in inefficiencies, increased costs and distance from their customers.

Question 22

Not-for-profit organisations

Answer 22

not in business for the money – they are not out to maximise profits. Instead their focus is on social or ethical objectives.

Question 23

charities

Answer 23

established with the aim of collecting money from individuals and spending it on a cause, which is usually specified in its title. Although they are not established to make profits, they can earn surpluses
Charities still raise the majority of their finances through voluntary donations, but more and more charities now operate retail outlets as well.

Question 24

Co-operatives

Answer 24

A co-operative is an organisation owned by its members. Employees of co-operatives automatically become members after a short probationary period, and shoppers at co-operative shops such as ‘the Co-op’, can apply to become members

Worker co-operatives are businesses which are owned and controlled by those who work in it

Question 25

Social enterprises

Answer 25

businesses with clear social objectives and are currently thriving in a number of industries and sectors of the economy

• Social enterprises trade to help solve social problems, improve the communities they operate in, and improve the environment.
• Many social enterprises aim to make profits from selling goods and services in the open market; but then they reinvest these profits, towards achieving their social objectives.