Types of business Flashcards
Business unit
A business unit is an organization formed by one or more
people with a view of engaging in a profitable activity
three common methods used
to classify businesses are:
Size
Industry
Legal structure
Size
Small to medium enterprises (SMEs),
• Large
• Although no universally accepted definition exists for a
small, medium or large business, a number of
measurements can be used to determine the size of a
business, including: Local, national, global, number of
employees and total market capitalization
• A local business, such as a newsagent, corner store,
hairdresser, mechanic or pharmacy, has a very
restricted geographical spread.
• It serves the surrounding area and is in no position to
offer a range of products to another suburb or town.
• Local businesses such as these will frequently be used
by consumers who live nearby
• The majority of local businesses tend to be small to
medium in size
A national business is one that operates within just one
country
• A global business, commonly referred to as a
Multinational corporation (MNC), is a large business with
a home base in one country that operates partially owned
or wholly owned businesses in other countries.
• Multinational corporations come in many different forms
and sizes
Industry
There are three main types of industry groupings or sectors: primary, secondary and tertiary.
• Due to the rapid growth in the tertiary industry over the last three decades, this sector has been subdivided into quaternary and quinary sectors.
• Primary industry includes all those businesses in which production is directly associated with natural resources.
• Secondary industry includes all those businesses that take the output of firms in the primary sector (raw materials) and process it into a finished or semi-finished product (manufacturing businesses).
Businesses in the tertiary industry provide a service. Tertiary industry involves people performing a vast range of services for other people. Examples include retailers, dentists, solicitors, banks, museums and health workers.
• Quaternary industry includes services that involve the transfer and processing of information and knowledge.
• Examples include telecommunication, computing, finance and education. The quaternary sector is expected to undergo dramatic change over the next 20 years due to the rapid advances in telecommunications.
• Expansion in e-commerce and internet-based business activity will see an increase in the number of people employed in information processing and analysis.
• Quinary industry includes all services that have traditionally been performed in the home.
• Examples include hospitality, tourism, craft-based activities and childcare. It includes both paid and unpaid work.
• Due to social and lifestyle changes, as well as an increase in the number of two income households, the demand for quinary-type services is estimated to expand rapidly during the next two decades.
Legal structure
There are a number of different legal structures to choose
from when deciding how a business is to be owned and
operated.
Sole proprietorship
A sole proprietorship is a business that is owned by one person.
• The owner may employ other people to work in the business, but the owner or sole trader is the person who provides all the finance, makes all the decisions and takes all the responsibility for the operation of
the business.
• This responsibility may include selling personal assets, such as property or motor vehicles, to pay for the liabilities of the business.
This is referred to as unlimited liability.
• Unlimited liability occurs when the business owner is personally responsible for all the debts of his or her business.
Advantages of sole proprietorship
Easy to start- no much legal sanction or consultation • Independence- owner at liberty to make any decision • Personal incentive- hard work pays • Quick decisions • Little small capital • Direct relations with customers • Can keep business secrets • Easy to wind up
Disadvantages of sole proprietorship
- Lack of Division of Labor
- Difficulty of Large Scale Production- limited capital
- Unlimited Liability- responsible for all profits and losses
- Difficulty of Credit
Partnership
A legal business structure that is owned and operated by between 2 and 20 people.
• Partnership is formed on the basis of a ‘Partnership Deed’ in which an agreement regarding the rights and duties, salary, share in the capital, etc. of each partner is mentioned.
• A partnership is similar to a sole trader in that the owner and the business are regarded as the same; that is, there is no legal entity.
Consequently, partnerships also have some element of unlimited liability.
• A partnership may be set up so that all of the partners are general partners.
General partner
A participant in a partnership who has unlimited personal
liability and takes full responsibility for managing the business
Limited partner
A partner in a business whose liability is limited to his or her
investment; a limited partner cannot be actively involved in
managing the business
Advantages of partnerships
Careful Decisions
• Division of Work
• More Capital
• Easier Credit
Disadvantages of partnerships
Lack of Mutual Confidence Personal Disputes Difficult to Separate Delay in Decision Difficult to close Unlimited liability Lack of responsibility Uncertainty
Companies
Includes private and public companies
• Companies- All companies are incorporated enterprises or have gone through the process of Incorporation.
• This means that the company has become a separate legal entity from its owners (shareholders).
• The idea of a separate legal entity is referred to as the ‘veil of incorporation’. This separate legal entity means that the company can sue and be sued; it can lease, sell or own property; and it has perpetual succession.
• In limited liability companies, the most money a shareholder can lose is the amount they paid for their shares.
Private companies
A proprietary/private company is the most common type
of company structure in Kenya, and usually has between 1
and 50 private shareholders.
• Private companies often tend to be small to mediumsized, family-owned businesses.
