1.2 Business Structure

Question 1

Private Sector

Answer 1

Comprises businesses owned and controlled by individuals or groups of individuals

Question 2

Public sector

Answer 2

Comprises organisations accountable to and controlled by central or local government ( the state )

Question 3

Mixed Economy

Answer 3

Economic resources are owned and controlled by both private and public (UK)

Question 4

Free-market economy

Answer 4

Economic resources owned largely by the private sector with very little state intervention (US)

Question 5

Command economy

Answer 5

Economic resources owned. planned and controlled by the state (pretty much VN)

Question 6

Sole trader

Answer 6

A business in which one person provides the permanent finance and, has full control of the business –> Able to keep all profits

Question 7

Advantages of sole trader

Answer 7

• Few legal formalities are required to operate the business.
• Total control over the business.
• The owner gets 100% of profits.
• Motivation because he gets all the profits.
• Able to choose times and patterns of working
• Personal contact with customers
• Business based on skills and interests of owner
• Does not have to share information with anyone but the tax office –> SECRECY

Question 8

Disadvantages of sole trader

Answer 8

• Nobody to discuss problems with.
• Unlimited liability ( all assets at risks )
• Limited finance/capital, business will remain small.
• The owner normally spends long hours working.
• Some parts of the business can be inefficient because of lack of specialists.
• Does not benefit from economies of scale.
• No continuity, no legal identity.

Question 9

Partnership

Answer 9

A business formed by two or more people to carry on a business together, with shared capital investment and, usually, shared responsibilities

Question 10

Disad of partnership

Answer 10

• Unlimited liability.
• No continuity, no legal identity.
• Partners can disagree on decisions, slowing down decision making.
• If one partner is inefficient or dishonest, everybody loses.
• Limited capital, there is a limit of 20 people for any partnership.

Question 11

Ad of partnership

Answer 11

• More capital than a sole trader.
• Responsibilities are split.
• Any losses are shared between partners.

Question 12

Limited Liability

Answer 12

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 owner

Question 13

Legal personality

Answer 13

Limited companies are recognised in law as having a legal identity separate from that of them their owners.
e.g: A company can be sued through courts, not the owners.

Question 14

Continuity

Answer 14

In a limited companies, the ownership continues through the inheritance of the shares –> no break in ownership –> companies don’t die like sole traders or partnership.

Question 15

Private Limited Company

Answer 15

• A small to medium- sized business that is owned by shareholders who are often members of the same family.
• Don’t sell shares to the general public.

Question 16

Shareholder

Answer 16

A person or institution owning shares in a limited company

Question 17

Share

Answer 17

A certificate confirming part ownership of a company and entitling the shareholder owner to dividends and certain shareholder rights.

Question 18

Advantages of Ltds

Answer 18

• The sale of shares make raising finance a lot easier.
• Shareholders have limited liability, therefore it is safer for people to invest but creditors must be cautious because if the business fails they will not get their money back.
• Original owners still control bc of limiting share distribution
• Greater status than unincorporated business
• Separate legal personality

Question 19

Disadvantages of Ltds

Answer 19

• Owners need to deal with many legal formalities when setting the company
• Shares cannot be freely sold without the consent of all shareholders.
• Public information must be provided to the Registrar of Companies.
• Capital is still limited as the company cannot sell shares to the public.

Question 20

Public Limited company

Answer 20

A limited company, often a large business, with the legal right to sell shares to the general public - share prices are quoted on the national stock exchange

Question 21

Ads of Public Limited Company

Answer 21

• Limited liability.
• Continuity.
• Potential to raise limitless capital.
• No restrictions on transfer of shares.
• High status will attract investors and customers.

Question 22

Disads of Public Limited Company

Answer 22

• Many legal formalities required to form the business.
• Many rules and regulations to protect shareholders, including the publishing of annual accounts.
• Difficult to control since it is so large.
• Owners lose control, when the original owners hold less than 51% of shares.

Question 23

Memorandum of Association

Answer 23

This 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 and the declared aims of the business.

Question 24

Articles of Association

Answer 24

This document covers the internal workings and control of the business - eg: The names of directors and the procedures to be followed at meetings will be detailed

Question 25

Franchise

Answer 25

A business that uses the name, logo and trading systems of an existing successful business

Question 26

Ads of Franchise for franchisor

Answer 26

- The franchisee has to pay to use the brand name. - Expansion is much faster because the franchisor does not have to finance all new outlets. - The franchisee manages outlets - All products sold must be bought from the franchisor.

Question 27

Disads of Franchise for franchisor

Answer 27

A-The failure of one franchise could lead to a bad reputation of the whole business. -The franchisee keeps some of the profits.

Question 28

Ads of Franchise for franchisee

Answer 28

- Reduced chance of failure due to the well know brand image. - The franchisor pays for advertising. - Quality supplies are assured from the franchisor. - Many business decisions will be made by the franchisor (prices, store layout, products). - Advice and training for staff and management is provided by the franchisor. - Banks are more willing to lend to franchisees because of lower risks.

Question 29

Disads of Franchise for franchisee

Answer 29

- Less independence - May be unable to make decisions that would suit the local area. - Licence fee must be paid annually and a percentage of the turnover must be paid.

Question 30

Joint venture

Answer 30

Two or more businesses agree to work closely together on a particular project and create a separate business division to do so

Question 31

Ads for Joint venture

Answer 31

- Shared costs are good for tackling expensive projects. (e.g aircraft) - Pooled knowledge. (e.g foreign and local business) - Risks are shared

Question 32

Disads for Joint venture

Answer 32

- Profits have to be shared. - Disagreements might occur as style of management and culture might be different - Errors and mistakes -> blame - Business fails if one of the partners puts the project at risk - The two partners might run the joint venture differently.

Question 33

Public corporation

Answer 33

A business enterprise owned and controlled by the state - also known as nationalised industry

Question 34

Ads of public corporation

Answer 34

- Managed with social objectives rather than solely with profit objectives - Loss- making services might still be kept operating if the social benefit is good enough - Finance raised mainly from the government

Question 35

Disads of public corporation

Answer 35

- Tendency towards inefficiency bc of lack of strict profit targets - Subsidies from gov -> Encourage inefficiencies - Gov may interfere in business decisions for political reasons

Question 36

Cooperatives

Answer 36

- A number of individuals or businesses work together, share workload, responsibilities to achieve a common purpose. - They are normally formed so individuals and small businesses can benefit from being part of a larger group, meaning they have more power to buy or bargain.

Question 37

Ads of cooperatives

Answer 37

- Buying in bulk - Working together to solve problems and take decisions - Good motivations of all members to work hard as they will benefit from shared profits

Question 38

Disads of cooperatives

Answer 38

- Poor management skills - Capital shortages bc of no sale of shares to the public - Slow decision making bc needed to consult all members

Question 39

Public goods

Answer 39

All public goods have two important characteristics: Non-excludability(open to the public) and Non-diminishability( non-rivalry. e.g: street light, military defence

Question 40

Merit goods

Answer 40

Generate substantial positive externalities Can be given privately, unlike public goods e.g: Health, education

Question 41

Demerit goods

Answer 41

Socially undesirable but usually overly-consumed goods Negative externalities e.g: Drugs, alcohol, cigarettes